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The Food and Agriculture Act of 1977, which authorizes price and income support programs for major crops and milk, expires in 1981. In the next few months the Congress must consider new legislation to modify, or reauthorize, the 1977 act.
This paper was prepared at the request of the Senate Committee on Agriculture, Forestry, and Nutrition. The study reassesses existing crop commodity programs and examines some broad alternatives toward which the Congress might direct policies in the 1980s. It also reevaluates the dairy price support program in light of rising federal outlays. In keeping with CBO's mandate to provide an objective and nonpartisan analysis of issues before the Congress, no recommendations are offered.
The principal author of this paper is James G. Vertrees. The paper was
prepared in CBO's Natural Resources and Commerce Division under the direction
of Deputy Assistant Director Damian J. Kulash. The author wishes to acknowledge
the contribution of Peter M. Emerson who provided constructive comments
and suggestions. Francis Pierce and Johanna Zacharias edited the manuscript,
and Paula Mills prepared it for publication.
Alice M. Rivlin
Director
March 1981
SUMMARY
CHAPTER I. INTRODUCTION
CHAPTER II. THE PERSPECTIVE OF THE 1980s
CHAPTER III. FOOD AND AGRICULTURE POLICY ALTERNATIVES
CHAPTER IV. DAIRY PRICE SUPPORT ALTERNATIVES
APPENDIX - ANNUAL PROJECTED VALUES FOR CONTINUATION OF CURRENT POLICY
AND FOR 75 PERCENT OF PARITY WITHOUT SEMIANNUAL ADJUSTMENTS
| TABLES | |
| 1. | U.S. AGRICULTURAL EXPORTS: SELECTED COMMODITIES, CALENDAR YEARS 1970 AND 1979 |
| 2. | U.S. CROP INDEXES (1960=100) |
| 3. | PER CAPITA PERSONAL INCOME OF THE FARM POPULATION, 1960-1980 |
| 4. | FARM INCOME IN THE UNITED STATES, BY ANNUAL GROSS SALES, 1979 |
| 5. | WORLD GRAIN SUPPLY AND U.S. FARM PRICES (1961-1979) |
| 6. | PROJECTED LOAN RATES AND MINIMUM TARGET PRICES UNDER CONTINUATION OF CURRENT POLICY, 1982 TO 1985 CROP YEARS |
| 7. | PROJECTED TARGET PRICES BASED ON TOTAL COST OF PRODUCTION, 1982 TO 1985 CROP YEARS |
| 8. | ESTIMATED BUDGETARY IMPACTS OF SELECTED POLICY ADJUSTMENTS, FISCAL YEARS 1983 TO 1986 |
| 9. | DISTRIBUTION OF DEFICIENCY AND LAND DIVERSION PAYMENTS TO WHEAT, CORN, GRAIN SORGHUM, AND BARLEY PRODUCERS, BY SIZE OF PAYMENT, 1978 |
| 10. | COMPARISON OF CONTINUED DAIRY PRICE SUPPORT POLICY AND REVERSION TO 1949 LEGISLATION, 1979-1980 AND 1981-1983 |
| FIGURES | |
| 1. | U.S. AGRICULTURAL TRADE SURPLUS |
| 2. | PERSONAL INCOME OF THE FARM POPULATION FROM FARM AND NONFARM SOURCES, 1965-1980 |
| 3. | FEDERAL COSTS OF AGRICULTURAL PRICE AND INCOME SUPPORT PROGRAMS |
Price and income support programs for major crops
and milk are currently authorized by the Food and Agriculture Act of 1977
which expires in 1981. In the next few months the Congress must consider
new legislation to modify, or reauthorize, the 1977 act. In the current
atmosphere of concern about a rising federal budget deficit and continuing
inflation, the enactment of food and agriculture legislation will be one
of the more important actions taken by the First Session of the 97th Congress.
Two parts of this legislation--namely, crop commodity programs for wheat,
feed grains, rice, soybeans, and upland cotton, and the dairy price support
program--are examined here.
CROP COMMODITY POLICY
Since the 1930s, the Congress has authorized a series of farm programs to stabilize farm prices and enhance producers' incomes. In the mid-1960s, the Congress began reducing real levels of price support to make U.S. farm products more competitive in international markets. To cushion the impact on farm incomes, payments were made to farmers participating in voluntary supply control programs. Spurred by rising world population and income growth, and encouraged by farm policies that kept crop prices competitive in world markets, U.S. agricultural exports increased from $7 billion in 1970 to $41 billion in 1980. Exports now take the production from one of every three harvested acres in the United States. The net foreign exchange earnings from agricultural trade--which grew from $2 billion in 1970 to $24 billion in 1980--recoup a third of all U.S. expenditures on imported oil.
As American farmers have increased their sales to foreign markets, the importance of government income support has diminished. At the same time, domestic farm prices and incomes have become more volatile, exposed to a broad array of uncontrollable forces, including weather fluctuations in other countries, shifts in U.S. trade and foreign policies, changes in currency exchange rates, and the farm, economic, and trade policies of other nations. In the 1980s, greater price instability is to be expected as the United States further encourages agricultural exports. The instability will be felt both by consumers, through fluctuating prices, and by producers, through uncertain incomes.
Long-Run Policy Alternatives
In the 1980s, traditional commodity programs, which now typically provide less than 5 percent of crop farmers' gross incomes, will become increasingly less important to their incomes. Even with their diminished reliance on these programs, farm families, on average, have increased their incomes relative to those of nonfarm families during the last decade. Furthermore, in future years, current programs will become less and less able to curb the instability stemming from increased participation in world markets. For these reasons, the Congress may want to continue to move toward alternative policies that emphasize stability relative to income support, three of which are outlined in this paper.
International Grain Reserves. A coordinated, international system of grain reserves could increase world and U.S. price stability. Under such a system, individual nations would establish facilities and procedures to acquire and release reserve stocks. These actions would be coordinated in accordance with agreed-upon rules aimed at keeping world prices within a desired price range. The reserve system would reduce farmers' uncertainty about future world prices and therefore encourage investment in additional production capacity along with the continued expansion of international trade. Food-importing and food-exporting nations have a common interest in achieving greater price and supply stability in world markets. Although the United States has long favored international grain reserves, progress to date has been limited. Many governments are unwilling or unable to adjust their agricultural and trade policies. Others take it for granted that the United States will continue to carry sufficient reserves to moderate any upsurge in world prices.
U.S. Reserves and Bilateral Agreements. If the simultaneous cooperation of many nations cannot be achieved, the United States could still make some progress in this direction by negotiating agreements with importing countries guaranteeing them grain at or below a ceiling price--under most circumstances--in exchange for the importer's promise to establish its own national reserves. This alternative could reduce price instability, although it runs counter to the U.S. stand on liberalizing trade, and could stimulate other nations to erect retaliatory barriers to trade. This approach would increase U.S. exports and strengthen prices in years of crop surpluses as participating nations filled their reserves. Conversely, it would moderate domestic price increases in years of crop shortages as participating nations drew down their own reserves rather than unexpectedly increasing purchases of U.S. grains. In effect, this approach would shift more of the cost and administrative burden of maintaining grain reserves to the grain-importing nations.
Income Insurance for Farmers. Regardless of whether either of the above stabilization policies may be achieved, the Congress could protect the incomes of crop producers by gradually replacing current programs with government-supported income insurance. An insurance program would cover the risk of income loss from fluctuations in supply and demand, thereby encouraging greater investment and output. Such an income insurance program could be an extension and expansion of the federal crop insurance program with premiums subsidized in order to transfer some of the risk inherent in agriculture to the public sector.
Short-Run Policy Alternatives
While the three alternatives outlined above have merit in the long run, the legislation to be considered by the Congress during the coming year will probably focus mostly on incremental modifications of current programs, probably continuing the long-term transition to a greater dependence on market forces.
Federal outlays for crop commodity programs have averaged $2.0 billion in recent years, about 75 percent of total outlays for all agricultural price support programs. Current crop programs support and stabilize prices through nonrecourse loans and the farmer-owned grain reserve, and support incomes through deficiency payments. Commodity loans provide relatively low levels of price support since loan rates are set below expected market prices to avoid interfering with exports. The subsidized, government-managed, farmer-owned grain reserve also helps to support farm prices, but in addition it acts to limit price increases. Storage payments and interest-free loans are used to encourage farmers to store grain when prices are low, and to sell grain when prices rise to specified levels. In this manner, the farmer-owned reserve helps to even out supplies coming on the market and to moderate price fluctuations. Deficiency payments are made to eligible grain and upland cotton producers if average market prices are below predetermined "target prices" which cover national average nonland production costs.
Continuation of Current Policy. Commodity programs have helped to stabilize prices, thereby reducing producers' uncertainty and encouraging production. Continuation of current programs would thus help to stabilize future crop prices, and perhaps keep crop prices slightly lower than they would be otherwise. But these effects would likely be small since, as in the 1970s, commodity programs would provide an ever-declining portion of farm income, and would play a decreasing role in stabilizing prices that are largely influenced by policies and events abroad.
Retail food prices would probably not be affected much by these programs--price supports would be below expected market prices, and acreage controls would be used infrequently. Federal outlays for crop programs, while representing a shrinking portion of the federal budget, would nonetheless be substantial--ranging from $1 billion to $5 billion annually over the next few years.
Reduction in Payment Limitations. By reducing the maximum allowable annual payments under the wheat, feed grain, rice, and upland cotton programs, federal expenditures could be lowered without affecting most participants or seriously impairing the effectiveness of commodity programs. Reducing the limitation from $50,000 to $5,000 per year would save about $35 million a year during fiscal years 1983-1986--about one-quarter of total payments.
Elimination of Deficiency Payments. Under a continuation of current policy, deficiency payments are expected to be much smaller and far less frequent than in the past. These payments have largely fulfilled their purpose--to smooth the transition toward fuller participation in the world market. Given the demonstrated willingness of crop farmers to produce food and fiber at prevailing market prices, deficiency payments are no longer necessary. In their place, price support loans, the farmer-owned grain reserve, and--if necessary--acreage diversion payments, could be used to prevent sharp drops in crop farmers' incomes. Elimination of deficiency payments would save $130 million annually over the next few years.
Full Cost-of-Production Target Prices. In contrast to the short-run
alternatives examined above, which could help to continue the transition
toward the market-oriented crop programs that have proved so effective
in recent years, some farmers propose setting support prices so that these
reflect all increases in production expenses, including land costs. In
particular, they would change the method of calculating target prices,
upon which government deficiency payments are based, so that target prices
are fully indexed to annual changes in total production costs. Such full
cost-of-production target prices would have serious inflationary and budgetary
consequences, increasing federal outlays by about $3 billion per year.
Also, this policy would reverse the long-term policy transition toward
greater reliance on the market, and would tend to escalate crop prices
and thereby hinder export growth.
DAIRY PRICE SUPPORT POLICY
Federal spending to acquire and dispose of surplus dairy products climbed rapidly from $0.3 billion in fiscal year 1979 to $1.3 billion in fiscal year 1980 and will reach $1.9 billion this year. Retail dairy prices have risen in response to the high farm prices induced by milk pricing policy. The rapid rise in government spending and the associated inflationary impacts have generated widespread concern about the method and levels of price support.
In sharp contrast to its reforms of crop commodity policy, the Congress has long adhered to a milk pricing policy that does not distinguish between price stabilization and income support. This policy, in an effort to support farmers' incomes, frequently leads to surplus milk production, higher consumer prices, and federal purchases of manufactured dairy products far in excess of those needed for price stability. As the Congress considers dairy price support legislation, the key issue will be how to support prices so as to provide reasonable protection to the income of dairy farmers, without undue impacts on retail prices and the federal budget.
The dairy price support program--which originated in the Agricultural Act of 1949--requires the Secretary of Agriculture to fix a nationwide support price for milk so as to assure adequate supplies of milk. Under this law the Secretary's discretion in setting the support price is limited to a range between 75 and 90 percent of the "parity price." (The parity price of milk, in dollar-and-cents terms, is the price that a hundredweight of milk would have to sell for today to give dairy farmers the same purchasing power they received from the sale of a hundredweight of milk just prior to World War I. It does not measure the net income of dairy farmers, since changes in productivity and the quantities of inputs purchased and products sold are not taken into account.)
More recently, the Food and Agriculture Act of 1977 imposed two provisions that led to high dairy price supports. First, it (and Public Law 96-127) set the minimum support level at 80 percent o£ parity. Second, it required the Secretary of Agriculture to adjust the support level semi-annually to reflect changes in the index of prices paid by farmers. These provisions will expire on September 30, 1981, unless new legislation dictates otherwise.
Market-Oriented Price Supports
While much of the Congressional debate will focus on these two provisions--75 versus 80 percent of parity and semiannual adjustments--it is important to recognize that parity prices do not measure the cost of producing milk, nor the economic conditions of dairy farmers, nor do parity prices reflect changes in the demand for milk. Milk pricing policy must respond to the forces of supply and demand if effective price stabilization is to be achieved at minimum cost to consumers and taxpayers. This could be done by giving the Secretary of Agriculture discretion to vary the level of price support in response to market conditions. In particular, the Secretary might be required to review average milk production costs and expected government purchases to determine the level of support. This would result in a milk pricing policy far more responsive to changing market conditions than the current parity price system.
Parity-Price-Based Supports
Alternative levels of parity price support have substantial consequences for the incomes of dairy farmers, retail dairy prices, and the federal budget. Relative to current policy (80 percent of parity with a semiannual adjustment), setting the support price at 75 percent of parity without a semiannual adjustment would, over the next three years:
Indeed, continuation of dairy price supports at 80 percent of parity would lead to even greater federal expenditures and dairy price increases than those already observed under this policy. In particular, under a continuation of current policy the net incomes of dairy farmers during the next three years would rise about 10 percent above the level of 1979-1980 after adjusting for inflation. Prices that consumers pay for dairy products would be about 5 percent higher in constant dollars. Government purchases would average 8 percent of annual milk production, costing taxpayers an average of $2.6 billion per year. These large purchases and rapidly growing government stocks would provide little, if any, further price stability or insurance of adequate supply beyond that which could be achieved with much lower purchases and stocks.
On the other hand, if the support price is lowered to 75 percent of parity, dairy farmers' real incomes and retail prices will remain at about 1979-1980 levels. Federal outlays will average about $1.5 billion per year, or $400 million less than current levels. Annual government purchases--although declining--will still average 6 percent of milk production. Therefore, even 75 percent of parity results in government purchases substantially greater than the minimum level needed for stability.
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