Extraordinary changes in U.S. farm policy
July 01, 1996
by Teresa Acklin
Sixty years of government land-idling programs and market-influencing price supports come to an end under new legislation.
The U.S. Federal Agriculture Improvement and Reform Act of 1996, or FAIR, is the most dramatic change in U.S. agricultural policy since the 1930s.
FAIR ended acreage control programs, eliminated direct support payments and terminated the grain reserve program, which was established in 1977 and expanded dramatically after the suspension of U.S. agricultural exports to the Soviet Union in 1980. FAIR also changed the price support loan program, minimizing the possibility that the U.S. government would acquire grain stocks — and ending the role of the government as supplier of last resort to the grain industry.
The termination of the Acreage Reduction Program is arguably the most important feature of the new law. Past laws gave the Secretary of Agriculture considerable discretion in establishing area reduction provisions based on reserve stocks on hand.
Each year, the U.S.D.A. engaged in a tug-of-war with budget officials over the percentage to be idled and the area to be planted the next year. Budget planners usually wanted to limit area to reduce stocks and overall costs. The U.S.D.A. position on acreage controls varied with the administration, with Republican Secretaries of Agriculture less prone to limit planted area and Democrats tending to opt more often for restrictions on plantings.
Politics sometimes influenced such decisions, especially in election years. Inattention or errors by U.S.D.A. officials also on occasion assumed immense importance.
For instance, in 1995, during a vacancy in the Secretary's office, the U.S.D.A. permitted a 7.5% reduction in maize area to be carried out, even though the supply situation had changed dramatically. The loss of around 12.7 million tonnes of U.S. maize that otherwise would have been produced contributed directly to the extremely high prices of recent months.
Effects on wheat.
The end of acreage limitations provides the opportunity for farmers to plant wheat on their old maize or grain sorghum acres or to plant feed grains on land that substantially had been "locked into" wheat by the old law. This is a boon for producers, but may affect the wheat sector adversely.
U.S. maize yields have risen more rapidly than wheat yields during the past 20 years (59% average yield gain for maize against 30% for wheat and grain sorghum since 1973-75). And breeding has made maize more drought-resistant than it was years ago. As a result, the U.S. "Maize Belt" may expand slightly to the west as farmers adapt to the "flexibility" in the new farm law. Wheat area would decrease accordingly.
The market-based solution to that situation would be for wheat prices to rise relative to maize prices over time, thereby encouraging a reduction in maize area in favor of wheat. Also, research on wheat varieties could be accelerated to overcome any disadvantage relative to maize.
New eligibility criteria for enrolling land into the conservation program also will influence wheat area in the next five years. Loose contracting procedures used by the U.S.D.A. in the late 1980s had brought 14% of the wheat area base into the program by 1995, compared with 5.3% of the maize base.
Much of the area in the program is good quality land not needing special conservation practices. Reduction of the conservation area by up to 15% to 20% by 2000 and a shift in enrollment from good land now in grass to highly erodible land would add 800,000 to 1.6 million potential wheat hectares.
Altogether, ending or modifying area programs should add around 5.4 million tonnes per year to U.S. wheat supplies by 2000. That may be offset by slightly reduced area if growers decide to move the Maize Belt westward.
Shrinking government storage.
The price support program for wheat was designed nearly 60 years ago to prevent market prices from falling below the loan level. (If market prices moved below the loan rate, farmers effectively "sold" wheat at the loan price to the government, which removed wheat supplies from market channels and helped to keep market prices from slumping further.) Because average loan rates in 1991-95 were about $41 a tonne less than average farm prices, the Commodity Credit Corp., the agency that manages government stocks of all commodities, acquired virtually no surplus wheat in this period.
Under the new law, the average wheat loan is set at about U.S.$95 a tonne. It may be reduced a little if wheat stocks increase materially, but it may not be raised, although a future Congress could amend the law. Only if average farm prices for wheat fall to or below U.S.$95 would the C.C.C. potentially acquire any stocks or incur any sizable loan costs. (In May, the average farm price was U.S.$213 a tonne.)
And even if prices were to fall disastrously, most producers would opt for a direct payment under a new "marketing loan" procedure rather than deliver their grain to the C.C.C. For instance, if wheat prices were to collapse to a level below U.S.$95 a tonne, farmers could choose to receive a deficiency payment essentially amounting to the difference between the depressed market price and the loan rate. The growers would not have to deliver wheat to the C.C.C. to receive that payment; the loan program, therefore, is no longer a mechanism for removing grain surpluses from the market.
The reserve program that was ended by FAIR actually was a by-product of the old loan program, so termination of the reserve followed naturally from the new format of the loan program.
The combination of marketing loan, a low loan rate and termination of the reserve puts an end to a key safety net formerly enjoyed by the wheat foods sector — government-held wheat surpluses. In fact, the reduction of government wheat stocks blunted flour price advances in eight of 10 years beginning with the 1986-87 season and ending May 31, 1996. But in future years, "reserve" stocks principally will be the responsibility of farmers and the grain trade.
Export programs and subsidies.
One reserve program — the Food Security Commodity Reserve — remains in effect under FAIR. The C.C.C. is required to own 4 million tonnes of commodities, mostly wheat, for use in overseas food emergencies and in ongoing food aid programs. Nearly all of the overseas food aid in this fiscal year will be provided from that reserve.
Some 3 million tonnes of wheat in this reserve will be available for food aid from mid-1996 onward. That total equates to about two years' supply of food aid. It will almost surely be used, thereby reducing the pressure of export demand on free supplies.
The U.S.D.A. is required to rebuild the reserve by buying or otherwise acquiring wheat as soon as a good crop makes purchases practical. Such replenishment cannot even be considered until after the 1997 harvest.
FAIR also extends and amends the Export Enhancement Program through 2002. Subsidies under EEP were suspended in August 1995, but U.S.D.A. officials continue to talk as if they could restart them at any time. In reality, export subsidies for wheat are close to unthinkable for about the next year and are unlikely to be used for any large quantity of flour exports for at least a year.
The U.S.D.A.'s projected world wheat harvest of 578 million tonnes, compared with the record of 588 million tonnes in 1990, would be largely consumed within the following 12 months. Price cutting in world markets, therefore, will surely not precede the 1997 crop. The limited U.S. supply of wheat and flour for export in the coming year provides not the slightest ground for subsidized exports.
FAIR also urges the Secretary to use export subsidies to maintain the U.S. position in world flour markets. This advice came after the House of Representatives had passed an amendment to require use of the EEP to maintain the share of the world flour market enjoyed in recent years, without regard to wheat supplies and prices, except for durum.
Export subsidy funds in fiscal year 1997 (beginning Oct. 1, 1996) will be limited to U.S.$250 million. A large carryover of unspent EEP funds from the 1996 fiscal year also will be available in 1997 and future years, in case surpluses and price cutting follow the present tight supply-demand balance.
FAIR extends some "bear trap" provisions to make any U.S. embargo, limitation or suspension of agricultural exports costly to the U.S. government.
If wheat exports were to be restricted, U.S.D.A. would have to raise the price support loan for wheat to around U.S.$303 a tonne. Producers also would have to be compensated for losses incurred following a unilateral suspension of exports that is not matched by similar action by other exporters.
The cost of these provisions and past experience with export restrictions make embargoes last-resort, emergency measures not likely to be used.
Future U.S. farm policy.
Aggregate payments to producers over the seven-year life of the 1996 act are set by law. Payments to individual producers will be set by seven-year contracts based on funds available and the grower's past production. Once established, the payment cannot be reduced. Just about everything else in FAIR is potential grist for the legislative mill beginning next year.
Efforts to amend FAIR most likely will get a fast start in 1997 if one or both Houses of Congress change leadership again, renouncing the so-called revolution of 1994. Efforts to turn the farm policy clock back may include:
• raising loan rates in response to criticism by President Bill Clinton and Agriculture Secretary Dan Glickman that FAIR erodes the farmer safety net. This would increase government intervention in the market and budget costs — a hard sell in a budget-conscious Congress.
• re-establishing the reserve program. This already is under discussion because of present shortages. Short crops in other countries or for other commodities this year would give this proposal a boost. The World Food Summit, sponsored by the Food and Agriculture Organization of the United Nations and to be held in Rome in mid-November, will almost surely adopt resolutions in support of grain reserves.
In the longer term, Congress and the President jointly will appoint a Commission on 21st Century Production Agriculture to study and make recommendations for future agricultural policies.
This article was written by John A. Schnittker, president of Schnittker Associates, a U.S. agricultural research and policy group. Mr. Schnittker was U.S. Undersecretary of Agriculture from 1965 to 1969.