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This staff working paper was prepared at the request of the Senate Budget Committee. It assesses the budget and farm price consequences of a program of acreage reduction and paid acreage diversion for the 1983/1984 crops of wheat, corn, rice, and upland cotton. In keeping with the Congressional Budget Office (CBO) mandate to provide an objective and nonpartisan analysis of issues before the Congress, no recommendations are offered.

The authors are James G. Vertrees and Howard C. Conley. The paper was prepared in CBO's Natural Resources and Commerce Division under the supervision of Damian Kulash and David Bodde. Francis Pierce edited the paper, and Kathryn Quattrone prepared it for publication.
 

Alice M. Rivlin
Director
June 1982
 
 

Federal outlays on agricultural price support programs have surged upward in the last year. Commodity program outlays for feed grains, wheat, rice, and upland cotton are estimated at a record $9 billion in fiscal year 1982. This is up from the $2 billion spent in 1981 and well above average annual outlays in 1978-1981 of $3 billion. The fiscal 1982 surge in outlays stemmed from recent large crops combined with slack demand. Farm prices, which are heavily influenced by export demand, have weakened in response to above-trend increases in 1981/1982 world crop production coupled with below-trend increases in world consumption of feed grains, wheat, and upland cotton. The low prices brought the federal income support programs into play, triggering deficiency payments and encouraging farmers to place crops under nonrecourse loans and in the farmer-owned grain reserve.

Commodity program outlays are likely to remain high in coming years, primarily because of large domestic stocks. Beginning stocks for the 1982/1983 crop year are generally at their highest levels relative to use since the mid-1970s; despite current voluntary acreage reduction programs, most analysts expect that 1982/1983 crops will be large enough to maintain or increase existing stocks. Most of these stocks are held by farmers and financed by the government. Although they serve as a cushion in years of poor harvests, in other years they depress farm prices and raise federal outlays. If expectations about this year's crops are correct, then normal worldwide crops in the following year, 1983/1984, would probably add to stocks, continuing to depress farm prices and escalate outlays. Continuation of the current acreage reduction program would do little to reduce 1983/1984 ending stocks, raise prices, and improve farmers' prospects for 1984/1985.

The issue addressed by this paper is whether there is an equally effective but less costly way to reduce the income risks to farmers--in particular whether a paid acreage diversion program could achieve the intent of commodity price support programs with lower budget outlays. Under current law, the Secretary of Agriculture has broad authority to implement paid acreage diversion. The Department of Agriculture has asked for comments on options for the 1983/1984 wheat crop; program decisions for it must be announced by August 15, 1982, since planting of the winter wheat crop begins soon thereafter.

This paper provides the Congressional Budget Office's assessment of a program that would combine the current voluntary acreage reduction with a program of paid acreage diversion for the 1983/1984 crops. This assessment examines the likely effects on farm prices, farm income, and net budget outlays, including the effect on other commodity program outlays. It finds that such a program could indeed reduce crop production, raise farm prices, and lower net budget outlays. Higher prices, however, might eventually raise food prices by no more than 1.0 percent and increase the Consumer Price Index by 0.2 percent; these price increases could be larger if an effective paid acreage diversion program coincided with poor crops. Paid acreage diversion, however, is inconsistent with the long-term transition to a market-based farm sector.

This document is available in its entirety in PDF.