Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
10/1/99
Contacts:
Mark Edelman, Extension Economics, (515) 294-3000, x1edelma@exnet.iastate.edu
Del Marks, Extension Communication Systems, (515) 294-9807,
dkmarks@iastate.edu
PLAIN ECONOMIC SENSE
For release Oct. 4, 1999
Column 383
The Traditional Domestic Policy Options for the Farm Crisis
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
Increasingly, many farmers and nonfarmers are asking tough questions about farm aid: Do all farmers really need the assistance? What are the options? How do they work? Who really benefits? What are the long-term consequences? In this column, many traditional domestic policy options for dealing with a farm crisis are discussed.
Option 1. Increase Transition Payments. The 1996 Agricultural Marketing Transition Act (AMTA) set up seven-year transition payments for program commodities. Before the 1996 Act, program crop payments were tied to planting decisions. After the 1996 Act, the program crop base was frozen and the payment rates were to annually decline over the seven-year period. Each farm could vary the crop mix each year, and AMTA payments would not be changed.
One option for increasing farm assistance has been to increase the AMTA transition payments. For example, last year's Boone County AMTA transition payment for corn was 36 cents per bushel. Congress passed emergency aid that added an additional 19 cents. This year one farm aid proposal is to double or add 36 cents to the original AMTA transition payment. Adding supplemental payments for one year as proposed does not change the original payments planned for following years. Finally, larger farmers tend to receive larger payments--up to a payment limit of $40,000--because they tend to have a larger historical farm program base.
Option 2. Increase Loan Rates. Currently two programs use loan rates. Farmers can take out a nine-month commodity marketing loan on harvested grain based on the loan rate. When market prices are below the loan rate, the farmer can pay back the loan at the local county's posted price any time before the loan comes due. A local county posted price varies daily and is typically set about 5 cents below the local market price so there is no incentive for farmers to forfeit any grain to the government. Thus, the farmer receives the difference between the loan rate and the posted county price as a marketing loan gain that doesn't need to be repaid.
For example, suppose the corn loan rate in Boone County is $1.78 per bushel. A farmer can take out a commodity marketing loan at this rate. If the Boone County posted price is $1.53, the farmer pays back the loan at $1.53 per bushel and the commodity marketing loan gain would amount to 25 cents per bushel. The farmer also would be free to sell locally at $1.58 per bushel.
Loan Deficiency Program (LDP) payments also use the loan rates and local county posted price. However, the farmer simply receives a grant and does not take out a loan under this program. The farmer selects a day on which to receive an LDP payment for his harvested grain when the market price is below the loan rate. The difference between the loan rate and the local county posted price is the payment rate. LDP payments and marketing loan gains are subject to a $75,000 payment limit.
Increasing the loan rate would increase program payments to farmers who were able to harvest a crop--up to the $75,000 payment limit. In fact, farmers with a larger than normal crop benefit disproportionately, while farmers who experienced a short crop--due to drought or hail--do not benefit nearly as much because they have less crops to put under loan or upon which to receive an LDP payment. Increasing the loan rate also implies a more permanent multi-year change in payment rates. In turn, this may create a longer-term incentive for farmers to expand production, perhaps when the market is giving the opposite price signals.
Option 3. Re-establish Grain Reserves. The 1996 Farm Bill eliminated the Farmer-Owned Reserve (FOR) and government payments for storage. Instead, farmers now sell their surpluses on the market while the government picks up the price difference up to the loan rate as previously explained. Without the FOR, market prices are forced down to market clearing levels. This makes U.S. farmers more competitive in world markets. At the same time, government payments to U.S. farmers increase as the surplus grain forces the county posted prices down even further.
Some groups have proposed allowing farmers to extend their nine-month commodity loans to up to three years and to re-institute government storage payments that used to be 26.5 cents per bushel per year for corn. Compared to current policy, a three-year farmer-owned grain reserve program would take surpluses off the market during the current year, but increase the U.S. carryover stocks during the next three years. During the current year, with less grain on the market, market prices would not decline to the same degree. However, LDP and marketing loan payments to farmers would also be lower for the current year. Why? Because the county posted prices would not be as low with a reserve program compared to current policy. In the longer term, market prices with a farmer-owned reserve would likely be lower than they would otherwise be without a reserve. Why? Grain going into the reserve during the current year must come out back onto the market within three years.
Option 4. Expand the Conservation Reserve. Currently, about 31 million acres are in the Conservation Reserve Program (CRP). Under this program, farmers receive payments for taking eligible land out of production for ten years. The 1996 Farm Bill eliminated annual acreage reduction programs and paid diversion programs. The CRP program is the only remaining program in which the government has management influence over supply.
Some groups have suggested increasing the 36.2 million acre limit authorized for the CRP in the 1996 Farm Bill. Others have proposed a 3 to 5-year CRP program to take more acreage out of production. This approach would tend to reduce domestic production, reduce surpluses, and raise market prices. However if too much land is put into the CRP, higher market prices may encourage international competitors to expand their production and reduce the U.S. share of world trade. While larger farmers with eligible acres may disproportionately benefit from the CRP because they can potentially place more acres into the program, eligible acres are not uniformly distributed and CRP rental payments are subject to a $50,000 payment limit.
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