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Appendix 1. Background on Federal Farm Subsidy Programs

City Slickers: Appendix 1. Background on Federal Farm Subsidy Programs

March 1, 1995
The following section is excerpted from Geoffrey S. Becker. An Introduction to Farm Commodity Programs. CRS Report for Congress: July 20, 1994.

The U.S. Department of Agriculture's (USDA's) Commodity Credit Corporation (CCC) is required to provide assistance to 20 specified agricultural commodities, to achieve three primary objectives: to support prices, supplement incomes, and manage supplies. Supporters contend that financial help to the farm sector also ensures consumers an abundant supply of reasonably priced food. But critics believe that basic U.S. farm policies, conceived in the 1930s, no longer meet the needs of modern agriculture or society as a whole.

Commodities Supported

Current Law requires the Secretary of Agriculture to support the following commodities: cotton, rice, wheat, peanuts, milk, tobacco, feed grains (corn, barley, oats, sorghum, rye), soybeans and other oilseeds (sunflower seed, canola, rapeseed, safflower, flaxseed, mustard seed), and sugar (sugarcane and sugar beets).

Type and Extent of Support

Congress has devised a variety of techniques, some dating to the 1930s, for the CCC to assist producers. Generally, each was designed to achieve one of three broad policy objectives:

  • To support farm prices of designated commodities. The methods for achieving this goal have included nonrecourse loans, commodity purchases, and farmer-owned grain reserves;
  • To supplement incomes of those who produce them. Methods have included deficiency payments (based on target prices), incentive payments, marketing loans, loan deficiency payments, and disaster payments;
  • To manage supplies of particular commodities. Methods have included acreage reduction programs, paid acreage diversions, acreage allotments, marketing quotas, milk diversion and dairy termination programs, and production and marketing assessments.

Which techniques are used, the levels of aid they provide, and impacts on taxpayers, consumers, and/or other producers, differ among the commodities. Some products are supported by only one program tool; others receive their support through a combination of methods.

Wheat, feed grains, cotton, and rice producers have access to the most extensive set of program tools. Not coincidentally, these crops represented nearly $100 billion, or about 70 percent, of the approximately $142 billion in total CCC program outlays between fiscal years 1983 and 1992. Each year, USDA announces a program" for each of these crops. If farmers choose to enroll, they agree to abide by certain planting and other requirements in exchange for a variety of potential benefits. The enrollment usually takes place by early spring, prior to planting time, at county offices.

One primary benefit for wheat and feed grains producers is a CCC nonrecourse loan at harvest time. To qualify, a farmer pledges his crop as collateral and agrees to store it, usually for 9 months; he can later choose either to repay the loan or to forfeit his crop to the CCC to satisfy repayment. The loan is based on a per-bushel (or per-pound) rate; it serves as the lowest price a participating farmer will have to take for his crop. In some years, wheat and feed grains producers are permitted to, in effect, extend their loans by keeping their crops in longer storage under the farmer-owned reserve program.

Rice and cotton program participants have been using a variation of the nonrecourse loan known as the marketing loan, which requires them to repay their original CCC loan but permits redemption at less than the original rate of borrowing. The producer essentially pockets the difference as a subsidy.

Wheat, feed grains, cotton, and rice program participants also may benefit from deficiency payments, income supplements that are based upon a per-bushel (or per-pound) "target" price set by Congress for each crop. The subsidy is the difference between: (1) the average market price or CCC loan rate for the crop, whichever is higher and (2) the target price (which is set above the CCC loan rate).

In exchange for CCC loans and payments, enrolled producers must agree to participate in any acreage reduction program (ARP) announced for that year's crop. An ARP requires them to remove a designated percentage of their land from production and to devote it to conserving uses. One reason the Government uses the ARP feature is to limit potentially large, price-depressing surpluses. In some years, the ARP may be supplemented by a paid acreage diversion--either voluntary or as a further condition of eligibility--that offers an added financial incentive to take even more acres out of production

Legislative Authority

Some standing authority for CCC programs is provided by three permanent laws: the Agricultural Adjustment Act of 1938 (P.L. 75-430), the Agricultural Act of 1949 (P.L. 81-439), and the Commodity Credit Corporation Charter Act of 1948 (P.L. 80-806). However, while the programs retain many of the features of these laws, Congress has frequently altered them, usually through omnibus, multi-year farm bills. The most recent omnibus farm law, which is now guiding program operations through 1995, is the Food, Agriculture, Conservation, and Trade Act of 1990 (P.L. 101-624). The programs also must meet certain cost-saving requirements outlined in the Omnibus Budget Reconciliation Acts of 1990 and 1993 (P.L. 101-508 and P.L. 103-66, respectively).

USDA's Land Conservation Programs

The following section was prepared by the Environmental Working Group

In addition to Federal commodity support programs, the USDA administers a number of conservation programs that provide direct payments to farmers for a variety of land retirement, management and conservation treatment activities.

The lion's share of federal land conservation spending has come through the Conservation Reserve Program (CRP) which transfers nearly $1.8 billion per year in the form of annual rental payments to farmers who have taken marginal lands out of production, planting them to grass or trees. By the time all 375,000 existing CRP contracts expire, the program will have paid over $19 billion to farmers. Over half of those payments, which began in 1986, had been made by the end of 1994. In addition, USDA provides roughly $200 million annually in cost-share funds to producers for conservation improvements on their land. These cost-share programs include the Agricultural Conservation Program (ACP), the Forestry Incentives Program (FIP), the Water Quality Incentives Program (WQIP) and others. Payments for these and other programs are captured in the database used to prepare City Slickers.

Disaster Programs

In most years for which this study presents data, USDA made substantial payments to farmers for a wide range of disasters. So-called ad hoc disaster bills funneled billions of dollars in payments to farmers for damages incurred from floods, droughts, hurricanes, hail, early frost, and other natural calamities. In 1994, ad hoc disaster assistance was in theory replaced by comprehensive federal crop insurance. All disaster payments made to farmers through ASCS between 1985 and 1994 are captured in the database used to prepare City Slickers.