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US agricultural policy: components, goals and possibilities for change
US agricultural policy Components, goals and possibilities for change
Robert L. Thompson
The Bush administration has a strong commitment to market-oriented agriculture. Therefore it is likely to stay the course with the 1985 Farm Bill and encourage extension of its marketoriented provisions into the next agricultural legislation. It will work aggressively to seek multilateral reductions in subsidies that stimulate excessive agricultural production in inefficient producing areas around the world, including the USA. At the same time the administration must reduce the federal budget deficit, and deficiency payments to US farmers can be expected to be reduced in the context of deficit reduction. Future US farm policy is likely to continue moving towards a more pronounced market orientation, but the USA will not unilaterally disarm in agricultural policy. The main two factors affecting future US agricultural policy will be progress made in the Uruguay Round of GATT negotiations and steps taken to reduce the federal budget deficit. Robed L. Thompson is Dean of Agriculture, Purdue University, West Lafayette, IN 47907, USA. He served as Assistant Secretary for Economics at the US Department of Agriculture during the writing of the 1985 Farm Bill.
In January 1990 the US Congress began deliberations on a new Farm Bill which will guide US agricultural policy during the early 1990s. At the same time, Uruguay Round trade negotiators at the GATT are trying to reduce barriers to trade and to cut domestic agricultural subsidies that distort trade. US farm policy has a pervasive effect on prices in the world markets for agricultural commodities. It is essential to understand US farm policy and its determinants to accompany the developments that are underway in both Washington and Geneva in 1990. The purpose of this article is to review the principal components of the US farm programmes and discuss some of the changes that were made in the Food Security Act of 1985, popularly known as the 1985 Farm Bill.’ First, several important characteristics of US agriculture that are important to understanding the country’s farm policy are reviewed. Next, the important moves towards a market orientation made in that 1985 act of Congress are highlighted. Then the next farm bill, being written in 1990, is discussed. Most US farm organizations generally like the 1985 Farm Bill, as do many members of Congress. The Bush administration has pledged its commitment to maintain the movement towards market orientation in agricultural policy. The two most important factors affecting the next farm bill in the USA will probably be the need to reduce government spending in order to reduce the federal budget deficit and the progress that is being made in the multilateral trade negotiations under the auspices of the GATT.
Characteristics ‘US Congress, House of Representatives, food Security Act of 7985, Conference Report 99-447, Washington, DC, USA, 1985. *The data cited in this section are from Council of Economic Advisers, Economic Repoti of the President, Washington, DC, USA, 1984, and more recent volumes.
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Several characteristics of US farming are important to understanding farm policy.2 The first of these is that US agriculture continues to be a family-farm-based industry. More than three-fourths of US farms are part-time farms, and 62% of all farm family income comes from off the farm. Less than 2% of US farms are corporate agribusiness investments, although many family farms have been incorporated for tax planning or estate planning purposes.
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Agriculture is a high-tech industry in the USA. Agriculture has enjoyed one of the fastest rates of growth in productivity of any sector of the US economy over the past 100 years. Farm production has tripled in the 20th century while employment in agriculture has fallen by 80%. The increase in labour productivity and. in turn, farm family income was achieved by improving technology and increasing the land and capital used per worker. The USA is abundantly endowed with fertile farm land. About 150 million ha of land have been cultivated. Today there are about 30 million ha idle, leaving roughly 120 million ha in production. The idle land provides an important reserve for potential expansion of production in the future. It is interesting to note that, as the number of farmers has fallen in this century, there has been virtually no reduction in the number of farm land owners. This means that many farmers achieve a commercially viable size of operation by renting part of the land they cultivate. US agriculture is a very capital-intensive sector. In fact, the investment in machinery, equipment and buildings per person employed in agriculture is twice that of the US manufacturing sector. Moreover, within agriculture there are roughly $3 invested in farm land for every $1 invested in physical capital. The US farm sector is very export-dependent. In 1981 the output of 2 out of every 5 ha of land was exported. In that year farm exports generated 20% of all export earnings of the US economy. Therefore exports are important to the well-being of agriculture, and farm exports are very important to the overall US balance of payments. Finally, US agriculture is a very policy-dependent sector. Price and income support policies can have important effects - positive or negative - on the functioning of the farm sector. Because of its capital intensity and export dependence, US agriculture is also strongly influenced by macroeconomic policy. Nevertheless, it is important to point out that participation in farm programmes is completely voluntary in the USA. No farmer is obliged to participate in the programmes in any given year. With few exceptions, any farmer can produce anything he wishes freely for sale on the open market. However, the price of participating in the government price and income support programmes is often accepting certain limitations on production.
Farm programme components The two essential objectives of US farm policy are stabilization of prices and stabilization of farm income. The following description generally covers the programmes for wheat, feed grain (maize, barley, sorghum and oats), cotton and rice. The instrument of price support utilized by the Commodity Credit Corporation (CCC) of the US Department of Agriculture (USDA) is the non-recourse loan. Under this programme the CCC offers loans to farmers at harvest time with their crops pledged as collateral. The size of the loan equals the support price (the ‘loan rate’) times the quantity of the farmer’s crop put under loan. The loans are made for a period of nine months. If the market price rises sufficiently during the period of the loan, the farmer may pay off the loan plus interest and reacquire control of his crop. If the market price is not sufficiently above the loan rate when the loan comes due, the farmer
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can then freely default. The CCC accepts the commodity as payment in full and cancels the loan and interest. The price support loan programme is really a buffer stock scheme. The loan rate puts a floor under the market price in periods of slack demand. When the market price rises to a sufficiently high level (for example, 150% of the loan rate at which the commodity was put under loan) the CCC can sell the commodity back into the market at a profit, helping to defray its cost of operation. The buffer stock is designed to protect grain producers against abnormally low prices and to protect consumers, both in the USA and abroad, against unusually high prices. In practice there are really two types of reserve stocks. First is the nine-month CCC price support loan programme just described. In addition, there is a three-year farmer-owned reserve (FOR) loan programme which works in a very similar manner except that the farmer retains title to the grain during the three-year period of the loan. Operationally, the FOR has very similar characteristics to the CCC programme, for if the market price rises sufficiently high it will trigger the release of the stocks. There is also a third source of ‘reserve stocks’ in the US feed grains economy - this, of course, is the very large livestock herd and poultry flock. When feed grains prices rise, this reduces the profitability of producing livestock or poultry, and farmers tend to reduce the size of their poultry flock or their livestock herd, freeing the grain that they would have eaten to go into the marketplace. In practice this is one of the most important buffers of feed grain prices in the US system. A second important component of US farm programmes is the income stabilization component. A target price is established somewhat above the loan rate as a target level of return per unit of product. The difference between the target price and the higher of the loan rate or the season average price is paid to the farmer as a deficiency payment on a specified volume of production. The allowable volume of production on which deficiency payments can be based is a fraction of a farmer’s historical production base acreage times a trend yield per acre of a given commodity produced. That is, the deficiency payment is not paid on the entire crop. Furthermore, there is a built-in income stabilization component in that the deficiency payment is based on a trend yield and not on the actual yield realized by a farmer in any given crop year. The third component of US farm programmes is the acreage set aside. In periods of excess capacity relative to current conditions, such that a substantial accumulation of government stocks results, an acreage reduction programme is implemented. In order to participate in a price support loan programme and to receive deficiency payments, farmers are obliged to set aside a prescribed fraction of their historical production acreage base for that commodity. In periods of particularly large government stocks, the Commodity Credit Corporation may also offer farmers payments to set aside an even larger fraction of their historical production base. For example, in the 1988 crop year the corn target price was set at $115 per metric ton and the loan rate at $70 per metric ton. To be eligible for these programme benefits each grower was required to set aside 20% of his corn acreage base. In addition, farmers were offered a payment of $69 per metric ton of historical yield to set aside an optional additional 10% of their base. About half the corn growers took advantage of this option, so in effect about 25% of the national corn
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Three components
of the 1988 corn programme. $115/metric ton $45lmetric ton $70/metric ton 20% 10% tic’ $68/metric ton
Target price Maximum defiency payment Loan rate Acreage reduction Paid land diversion
base was set aside in crop year 1988. Almost 90% of corn growers participated in the 1988 government programme. The other 10% had no limits on their production, but they sold their entire output at the prevailing world market price. Table 1 lists the provisions of the 198X programme available to corn growers. Table 2 then shows the participation options a corn grower confronted and illustrates the differences in outcome under strong and weak world market price scenarios. The Secretary of Agriculture has considerable discretion in administering the farm programmes. One of his most important decision variables is the amount of acreage to set aside in any given crop year. The international market strengthened following the severe drought in the USA in the summer of 198X. As a result there has been a significant reduction in the size of inventories of grain in government hands. These stocks were released back into the marketplace, thereby preventing market prices from rising more than they did in 1988. As a result of the drawdown in stocks that occurred, it was not necessary to run as large an acreage reduction programme in 1989. The Secretary of Agriculture therefore set the acreage reduction required to participate in target price and loan rate programmes in 1989 at only 10% instead of the 20% required in 1988. Furthermore, he offered no payments to divert more land from production than the basic 10%. This management of the programme helps to ensure that the USA has plenty of grain available to meet its commitments in both the national and the international markets. The set-aside land is, in a sense, another ‘reserve’ to ensure the reliability of the USA as a supplier to the world market. 3For more detail see ibid, pp 112-l 14, and Lewrene Glaser, Provisions of the Food Security Act of 7985, Economic Research Service, Washington, DC, USA, 1986.
1985 Farm Bill The essential
elements
of US grains policy have been reviewed.’
Table 2. Options available to a corn grower under the 1988 farm programme, under strong and weak world market price scenarios.
Let us
and outcomes
Farmer has 100 ha corn land with a five-year average yield of 7.5 metric tons/ha (mtfha), but due to drought harvests 6 mt/ha. Option 1
Option 2
Plant 100 ha and rely on market for income: 100 ha x 6 mVha = 600 mt.
Plant 80 and receive price plus income assurance: 80 ha x 6 mffha = 480 mt.
Scenario 1: $6O/mf world price From sale in market farmer realizes: 600 mt x $60 = $36 000.
Scenario 2: $720/mt world price From sale in market farmer realizes: 600 mt x $120 = 572 000.
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Farmer receives loan at harvest: 480 mt x $70 = $33 600. He also receives deficiency payment: 60 ha x 7.5 mtfha x $45/mt = $27 000. Total receipts = $60 600 and government keeps the corn.
From sale in market farmer realizes: 480 mt x 5120 = $57 600 He must repay loan with interest. He receives no deficiency payment.
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now examine more specifically the Food Security Act of 1985 and how it moved the US grains sector in a more market-oriented direction. We will focus on six key outcomes of that farm bill. Loan rates In the 1981 Farm Bill US loan rates were set in law at levels that turned out to be too high during the period of the extremely strong dollar. As a result the export competitiveness of US grain was severely eroded. Instead of being exported at a competitive price, it tended to be purchased by the Commodity Credit Corporation and to accumulate in government stocks. This led to larger and larger acreage reduction programmes and further reductions in exports. By this means the USA unilaterally supported the whole world market price structure at its loan rates. When Congress wrote the 1985 Farm Bill the most important objective was to restore the international competitiveness of US farm exports. To this end Congress changed the basis by which the loan rate is established for each important export commodity. Instead of fixing the loan rate in law as had been done in the 1981 Farm Bill for crop years 1982 through 1985, Congress established a formula for determining the loan rate. In the future the loan rate will be set at 75% of a five-year moving average market price, dropping the high and low years. This means that the loan rate will be permitted to move up or down with long-term trends in the market. In normal years the international price will be above the loan rate so that the loan rate will not interfere with international competitiveness. But the loan rate will still be there as a safety net in a year of bumper crops and weak market conditions which might unduly depress the price of the commodities. During a transition period Congress placed a limit on how quickly the loan rate could be dropped to that determined by the formula. The loan rate was permitted to fall 25% in 1986 and since then has been stepped down at about 5% per year in the direction *of the formula. This reduction in the loan rate was an extremely important change in agricultural policy. The change moved US export commodity sectors far in the direction of market orientation and demonstrated the large commitment of the USA to servicing the international market as a dependable, competitive supplier. Deficiency payments In the early 198Os, during the period of declining farm exports, severe downward pressure was placed on the value of farm assets. National average farm land prices fell by 30% in five years, and land prices fell by over 60% in the Corn Belt. This caused severe financial stress on farmers and large numbers of farm bankruptcies. In order to sustain the cash flow of the farm sector to help keep down excess debt and to avoid further farm bankruptcies, the Congress froze target prices for one or two years, depending on the commodity. With the 25% reduction in loan rates that occurred, this meant a significant short-term increase in the budget cost of farm programmes even in a period of increasing concern about the need to reduce the federal budget deficit. Nevertheless, Congress accepted that loan rates had to fall in order to restore the international competitiveness of US farm exports, and at the same time that target prices had to be frozen in order to sustain the cash
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flow of the farm sector. This permitted many farmers to pay off a substantial amount of debt and helped other farmers avoid bankruptcy. Today the financial health of the US farm sector is much improved, and the 1985 Farm Bill permitted nominal target prices to decline 10% over the period 1988-90. This is reducing the budget cost of the farm programme automatically now that the worst problems of farm financial stress are over. Conservation The 1985 Farm Bill provided a major commitment to improved soil conservation measures. Past agricultural policy had induced farmers to plough up fragile soils in order to expand their crop acreage base. The 1985 Farm Bill established a conservation reserve programme in which farmers are paid to retire fragile lands from production for a minimum of 10 years. The government provides an annual payment to farmers for them to set aside this land and compensates farmers for half the cost of establishing a cover crop or planting trees on that land. The conservation reserve is authorized to go up to 18 million ha of land. More than three-fourths of this target have been reached already. As more land goes into the conservation reserve, less land needs to go into the annual acreage reduction programmes. As a result, more of the national agricultural output is occurring on the more productive and less erodible soils. An important effect is to concentrate more production in lower-cost producing areas, thereby contributing to greater international competitiveness, while reducing soil erosion. In addition, to qualify for any government farm programme payments in the future, farmers will be obliged to follow good soil conservation practices. Payments in kind The 1985 Farm Bill authorized payments in kind in lieu of cash to pay for a number of farm programme provisions including deficiency payments, land diversion payments, disaster payments, conservation reserve payments and export subsidies. The motivation of Congress to provide payments in kind was to circumvent the budget constraint and permit larger income transfer to farmers in a period of severe financial stress. But the payments in kind also had a very important impact on keeping the grain markets liquid and ensuring that US grain prices were at internationally competitive levels. As indicated above, the release price on inventories of grain in the farmer-owned reserve is 140% of the loan rate at which that grain entered the reserve. The release price on Commodity Credit Corporation stocks of grain is 115% of the farmer-owned reserve release price. So the pre-1986 reserve stocks of grain had unrealistically high release prices relative to market conditions after the loan rate was dropped by 25% in 1986. By making payments in kind the CCC was able to release reserve stocks of grain back into the marketplace at current market value rather than at those unrealistically high release prices. This did indeed bring the US price of grain down to an internationally competitive level and thereby helped to get grain exports moving once again. It had the additional benefit, of course, of providing larger income transfers to US farmers and helped, by that means, to accelerate their recovery from the financial stress of the early 1980s. (See the Appendix for more detail on payments in kind.)
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Decoupling The 1985 Farm Bill made an important beginning at decoupling payments to farmers from current and future production. Decoupling has attracted a lot of interest in recent years because there is a widespread perception that many countries’ farm policies induce overproduction in high-cost or inefficient producing areas because government payments or subsidies are linked to the volume of production. By expanding production capacity, a farmer is able to qualify for larger farm programme benefits in the future. This tends to induce expansion into high-cost producing areas which otherwise could not compete in the international market in the absence of the subsidies. If payments are decoupled from current and future production, this incentive to inefficient production should be removed. Some observers suggest that before 1985 US target prices and deficiency payments had induced larger production than would otherwise occur in high-cost producing areas and were thereby contributing to surplus production that ended up in government stocks because it could not be sold overseas at a competitive price. Two small steps in the direction of decoupling payments from production were made in the 1985 Farm Bill. The first of these was the so-called 50-92 provision, which was later extended to G92 in 1986. Under this provision a farmer can receive 92% of his deficiency payment even if he plants none of his acreage base. This provision is only attractive to farmers in higher-cost producing areas, and the objective was to induce retirement of less-efficient producing areas from production in order to permit a larger fraction of the production to occur in lower-cost and therefore more competitive producing areas. The second manner in whch decoupling was initiated in the 1985 Farm Bill was in the form of an effective freeze on the historical acreage base and a reduction of about 10% in the programme payment yield per hectare (on which deficiency payments are based) from the 1985 level. As a result the loan rate or the expected market price, whichever is higher, should determine how much inputs a farmer purchases to apply to each hectare of land. In effect this changed the supply-inducing price from the target price to the higher of the loan rate or expected season average price. The result should be some reduction in the intensity of production on each hectare of land and therefore some modest reduction in the unit cost of production.
Other provisions The 1985 Farm Bill made a number of tough decisions in moving US agriculture in a more market-oriented direction. In addition to the changes described above for exportable commodities, it also started the difficult process of moving some import-competing sectors of US agriculture in a more market-oriented direction. One of the most politically difficult parts of agricultural policy is that affecting the dairy sector. Dairy farmers and dairy cooperatives are an extremely powerful group. Nevertheless, the problem of excess dairy production was attacked by two means. In the first two years of the 1985 Farm Bill the government paid farmers to slaughter 8% of the national dairy herd in order to help reduce excess capacity. In addition, an automatic trigger was put in effect to reduce the support price of milk by 1.1 c/kg for each year in which CCC purchases of butter, cheese and powdered milk are projected to exceed a relatively low trigger level. FOOD POLICY June 1990
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So, in summary, the 1985 Farm Bill provided an important turning point in US agricultural policy. It recognized the fundamental importance of exports to the economic health of the farm economy and made a firm commitment to protect the international competitiveness and dependability of supply of the USA to that international market. It did this by setting in motion significant movements in the direction of a market orientation and in the meantime provided substantial assistance to farmers to facilitate their transition back to economic health.
Looking towards the future The 1985 Farm Bill will guide agricultural policy through the 1990 crop year. Therefore the debate over future directions in US agricultural policy is well underway. It is important to remember that while the Bush administration will propose changes in farm policy, it is the Congress that writes the legislation. There is considerable inertia in present farm policy, and there is great inertia in the membership of Congress, particularly in the House of Representatives. Members of Congress understand how the present policy instruments work in practice, and they tend to be very cautious about adopting new or untested instruments. Furthermore, the commodity organizations are generally content with the present policy instruments. Taken together these forces exert pressure to continue the present policy measures even if the levels at which those policy instruments are set is changed. The administration’s most important role in farm policy is less in drafting the legislation than it is in implementing the legislation that is passed by Congress. The Congress usually provides a considerable amount of discretion to the Secretary of Agriculture to set the various policy instruments within rather broad parameters. Therefore the implementation decisions taken by the Bush administrative will set the tone of agricultural policy. The Bush administration can be expected to advocate staying the course with the 1985 Farm Bill, continuing to reduce loan rates until they reach the formula determination described above. Preserving the international competitiveness of US agriculture by keeping loan rates moving towards the formula will probably be an important Bush priority. The Bush administration will also probably put high priority on making progress in the multilateral trade negotiations to reduce production-distorting and trade-distorting agricultural subsidies around the world, to convert non-tariff agricultural import barriers to tariffs, and to set these on a downward trajectory. Bush has made it clear that he will not advocate unilateral disarmament by the USA in agricultural policy, but he will be willing to negotiate a generalized reduction in agricultural subsidies and trade barriers in order to level the playing field around the world. He would expect the USA to participate by reducing its own subsidies and trade barriers in concert with the concurrent reductions by other countries. As indicated above, significant redesigning of the instruments employed in agricultural policy is not likely in the 1990 Farm Bill. The only situation in which any substantial changes in US agricultural policy can be expected would be in the context of a GATT agreement for a simultaneous multilateral reduction in the level of subsidies to all
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commodities around the world. Even in this case the main change would probably be in the form of a faster reduction in deficiency payments rather than a fundamental modification of the nature of the policy instruments. The environment is propitious for progress in this GATT Round for reducing subsidies that distort production, and in turn, trade in agricultural commodities. Therefore ‘unilateral disarmament’ in the 1990 Farm Bill in advance of the GATT Round agreement will not occur. The other important factor that will affect future farm policy in the USA is the urgent need to reduce the federal budget deficit. Agricultural programme payments were the fastest-growing element in percentage terms in the federal budget in the first six years of the 1980s. However, since 1986, as exports have recovered and market conditions improved, the cost of US farm programmes has fallen by over half and represents the fastest-declining component of the federal budget. Nevertheless, after the substantial assistance that agriculture has received from the government in the 198Os, it is reasonable that agriculture participate in deficit reduction in the early 1990s. The effect of this on future farm programmes is likely to be in the form of greater pressure to reduce deficiency payments at a faster rate than would otherwise occur. In practice, this is likely to be translated into either faster reduction in target prices or reducing the volume of production on which deficiency payments may be made below today’s level. At the same time, Congress will attempt to provide more flexibility to farmers in their cropping decisions on acreage for which no deficiency payments are paid.” Concerning acreage reduction, at least 16 million ha of land will probably enter the conservation reserve. There may be some discussion of expanding the conservation reserve beyond that level in the 1990 Farm Bill, but evaluation of the supply-demand balance suggests that will not be merited. Furthermore, once at least 16 million ha enter the conservation reserve there should be no need for much annual acreage reduction by participants in the commodity programmes in normal years. More debate in 1990 is likely to focus on ensuring water quality and food safety than on the commodity programme provisions.” In summary, the USA made a major change in direction in agricultural policy in the 1985 Farm Bill. Both Congress and the commodity organizations appear to be satisfied in most instances with the way the 1985 Farm Bill is working. Any significant changes will be driven by budget considerations or a multilateral agreement to reduce subsidies in the GATT negotiations. agricultural
4For a more detailed discussion see Robert L. Thompson, ‘The 1985 Farm Bill as the basis for future farm legislation’, in Kristin Allen, ed, Agricultural Policies in a New Decade, National Center for Food and Agricultural Policy, Resources for the Future, Washington, DC, USA, 1990. ‘For more detail see Robert L. Thompson, ‘A farm and rural policy for the 199Os’, in Mark Drabenstott, ed, Positioning Agriculture for the 1990.x A New Decade of Change, National Planning Association, Washington, DC, USA, 1989, pp 133-l 42.
Appendix Payments in kind In 1982 the loan rate for exportable commodities like corn was set too high, given the large US crop, the weak world market demand and the very strong US dollar. Therefore CCC inventories grew rapidly, and in January 19X3 the USDA determined that massive set-asides of land would be required in 1983 to avoid even larger
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stock accumulations. The USDA decided to pay farmers in kind, ie with physical inventories of grain instead of cash, to set aside some 30 million ha of land in 1983. The 1983 experience demonstrated that it is inefficient to make payments to close to 2 million individual farmers with physical grain. Furthermore, it is
expensive to physically move grain around the country from where it is stored to where payment is needed. Therefore, when the 198.5 Farm Bill authorized payment in kind for mumerous components of US farm policy, it was decided to effect such payments by means of ‘generic payment-in-kind certificates’. The cer-
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tificates are denominated in dollars and are freely transferable. There is no limit to the number of transfers. The certificates have an eight-month life and can be redeemed by the farmer for cash in the last two months before expiration. In their first six months of life, however, the certificates can be redeemed by a farmer for commodities he has under a price support loan, or they can be redeemed by anyone for commodities owned by the CCC. Certificates are generic in the sense that they are denominated in dollars and can be redeemed for any commodity in the CCC’s inventory. The motivation for using dollardenominated, transferable certificates is that it is much more efficient and cheaper to move pieces of paper around the country than to move physical grain to the point where payment must be made. When the programme started it was hoped that a market would develop for the certificates so that only commodity firms or large users of commodities would redeem certificates for government-owned inventories. For example, a grain company could buy up enough certificates to load a whole unit train of corn from a CCC warehouse. To accomplish this the CCC regularly published a catalogue listing
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the volume of each commodity it had available for release at each location. Large volume handlers of certificates could then ‘buy’ that grain out of CCC inventories at current market value, not at the much higher official release price. This increased the liquidity in the marketplace and ensured that the US price of exportable commodities like corn would be kept at competitive levels. Certificates could also be used by farmers to redeem their own grain under a price support loan to the CCC. Again, the USDA’s objective was to get that grain back into the marketplace or available for farmers’ own use in feeding livestock or poultry. For this purpose farmers could use both certificates they had received as payment from the government and certificates that they themselves had bought in the market from other farmers. Because certificates are denominated in dollars, some per-unit redemption price was needed to translate dollars into units of commodity. Therefore the USDA established a posted county price (PCP) for each exchangeable commodity for each business day. Each county’s PCP of grain was based on some terminal cash price the previous day less a fixed differential to
each county based upon transportation costs. For example, assume that on a given day the posted price in a county was $55 per metric ton, but the loan rate received by the farmer was $72. By using certificates to redeem the grain he had under loan, the farmer could realize a gain of $17 per ton. With this big a differential it is no wonder that a market developed which paid a premium for certificates. On the same day as this example occurred the market for certificates was paying 112-116% of face value. This increased the value of government farm programme benefits to those farmers who sold their certificates. The other farmers who bought certificates to redeem grain they had under loan also came out ahead. Since the autumn of 1988 there has been realtively little use of certificates because CCC inventories are much smaller as a result of the drought and grain markets are much stronger. In addition, the legislated release price for grain that has entered CCC inventories since 198.5 is much more reasonable relative to current world market prices. While it is impossible to predict at this time, there is some chance that payment-in-kind authority may be eliminated in the next farm bill.
FOOD POLICY June 1990
Robert L. Thompson
The Bush administration has a strong commitment to market-oriented agriculture. Therefore it is likely to stay the course with the 1985 Farm Bill and encourage extension of its marketoriented provisions into the next agricultural legislation. It will work aggressively to seek multilateral reductions in subsidies that stimulate excessive agricultural production in inefficient producing areas around the world, including the USA. At the same time the administration must reduce the federal budget deficit, and deficiency payments to US farmers can be expected to be reduced in the context of deficit reduction. Future US farm policy is likely to continue moving towards a more pronounced market orientation, but the USA will not unilaterally disarm in agricultural policy. The main two factors affecting future US agricultural policy will be progress made in the Uruguay Round of GATT negotiations and steps taken to reduce the federal budget deficit. Robed L. Thompson is Dean of Agriculture, Purdue University, West Lafayette, IN 47907, USA. He served as Assistant Secretary for Economics at the US Department of Agriculture during the writing of the 1985 Farm Bill.
In January 1990 the US Congress began deliberations on a new Farm Bill which will guide US agricultural policy during the early 1990s. At the same time, Uruguay Round trade negotiators at the GATT are trying to reduce barriers to trade and to cut domestic agricultural subsidies that distort trade. US farm policy has a pervasive effect on prices in the world markets for agricultural commodities. It is essential to understand US farm policy and its determinants to accompany the developments that are underway in both Washington and Geneva in 1990. The purpose of this article is to review the principal components of the US farm programmes and discuss some of the changes that were made in the Food Security Act of 1985, popularly known as the 1985 Farm Bill.’ First, several important characteristics of US agriculture that are important to understanding the country’s farm policy are reviewed. Next, the important moves towards a market orientation made in that 1985 act of Congress are highlighted. Then the next farm bill, being written in 1990, is discussed. Most US farm organizations generally like the 1985 Farm Bill, as do many members of Congress. The Bush administration has pledged its commitment to maintain the movement towards market orientation in agricultural policy. The two most important factors affecting the next farm bill in the USA will probably be the need to reduce government spending in order to reduce the federal budget deficit and the progress that is being made in the multilateral trade negotiations under the auspices of the GATT.
Characteristics ‘US Congress, House of Representatives, food Security Act of 7985, Conference Report 99-447, Washington, DC, USA, 1985. *The data cited in this section are from Council of Economic Advisers, Economic Repoti of the President, Washington, DC, USA, 1984, and more recent volumes.
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Several characteristics of US farming are important to understanding farm policy.2 The first of these is that US agriculture continues to be a family-farm-based industry. More than three-fourths of US farms are part-time farms, and 62% of all farm family income comes from off the farm. Less than 2% of US farms are corporate agribusiness investments, although many family farms have been incorporated for tax planning or estate planning purposes.
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Agriculture is a high-tech industry in the USA. Agriculture has enjoyed one of the fastest rates of growth in productivity of any sector of the US economy over the past 100 years. Farm production has tripled in the 20th century while employment in agriculture has fallen by 80%. The increase in labour productivity and. in turn, farm family income was achieved by improving technology and increasing the land and capital used per worker. The USA is abundantly endowed with fertile farm land. About 150 million ha of land have been cultivated. Today there are about 30 million ha idle, leaving roughly 120 million ha in production. The idle land provides an important reserve for potential expansion of production in the future. It is interesting to note that, as the number of farmers has fallen in this century, there has been virtually no reduction in the number of farm land owners. This means that many farmers achieve a commercially viable size of operation by renting part of the land they cultivate. US agriculture is a very capital-intensive sector. In fact, the investment in machinery, equipment and buildings per person employed in agriculture is twice that of the US manufacturing sector. Moreover, within agriculture there are roughly $3 invested in farm land for every $1 invested in physical capital. The US farm sector is very export-dependent. In 1981 the output of 2 out of every 5 ha of land was exported. In that year farm exports generated 20% of all export earnings of the US economy. Therefore exports are important to the well-being of agriculture, and farm exports are very important to the overall US balance of payments. Finally, US agriculture is a very policy-dependent sector. Price and income support policies can have important effects - positive or negative - on the functioning of the farm sector. Because of its capital intensity and export dependence, US agriculture is also strongly influenced by macroeconomic policy. Nevertheless, it is important to point out that participation in farm programmes is completely voluntary in the USA. No farmer is obliged to participate in the programmes in any given year. With few exceptions, any farmer can produce anything he wishes freely for sale on the open market. However, the price of participating in the government price and income support programmes is often accepting certain limitations on production.
Farm programme components The two essential objectives of US farm policy are stabilization of prices and stabilization of farm income. The following description generally covers the programmes for wheat, feed grain (maize, barley, sorghum and oats), cotton and rice. The instrument of price support utilized by the Commodity Credit Corporation (CCC) of the US Department of Agriculture (USDA) is the non-recourse loan. Under this programme the CCC offers loans to farmers at harvest time with their crops pledged as collateral. The size of the loan equals the support price (the ‘loan rate’) times the quantity of the farmer’s crop put under loan. The loans are made for a period of nine months. If the market price rises sufficiently during the period of the loan, the farmer may pay off the loan plus interest and reacquire control of his crop. If the market price is not sufficiently above the loan rate when the loan comes due, the farmer
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can then freely default. The CCC accepts the commodity as payment in full and cancels the loan and interest. The price support loan programme is really a buffer stock scheme. The loan rate puts a floor under the market price in periods of slack demand. When the market price rises to a sufficiently high level (for example, 150% of the loan rate at which the commodity was put under loan) the CCC can sell the commodity back into the market at a profit, helping to defray its cost of operation. The buffer stock is designed to protect grain producers against abnormally low prices and to protect consumers, both in the USA and abroad, against unusually high prices. In practice there are really two types of reserve stocks. First is the nine-month CCC price support loan programme just described. In addition, there is a three-year farmer-owned reserve (FOR) loan programme which works in a very similar manner except that the farmer retains title to the grain during the three-year period of the loan. Operationally, the FOR has very similar characteristics to the CCC programme, for if the market price rises sufficiently high it will trigger the release of the stocks. There is also a third source of ‘reserve stocks’ in the US feed grains economy - this, of course, is the very large livestock herd and poultry flock. When feed grains prices rise, this reduces the profitability of producing livestock or poultry, and farmers tend to reduce the size of their poultry flock or their livestock herd, freeing the grain that they would have eaten to go into the marketplace. In practice this is one of the most important buffers of feed grain prices in the US system. A second important component of US farm programmes is the income stabilization component. A target price is established somewhat above the loan rate as a target level of return per unit of product. The difference between the target price and the higher of the loan rate or the season average price is paid to the farmer as a deficiency payment on a specified volume of production. The allowable volume of production on which deficiency payments can be based is a fraction of a farmer’s historical production base acreage times a trend yield per acre of a given commodity produced. That is, the deficiency payment is not paid on the entire crop. Furthermore, there is a built-in income stabilization component in that the deficiency payment is based on a trend yield and not on the actual yield realized by a farmer in any given crop year. The third component of US farm programmes is the acreage set aside. In periods of excess capacity relative to current conditions, such that a substantial accumulation of government stocks results, an acreage reduction programme is implemented. In order to participate in a price support loan programme and to receive deficiency payments, farmers are obliged to set aside a prescribed fraction of their historical production acreage base for that commodity. In periods of particularly large government stocks, the Commodity Credit Corporation may also offer farmers payments to set aside an even larger fraction of their historical production base. For example, in the 1988 crop year the corn target price was set at $115 per metric ton and the loan rate at $70 per metric ton. To be eligible for these programme benefits each grower was required to set aside 20% of his corn acreage base. In addition, farmers were offered a payment of $69 per metric ton of historical yield to set aside an optional additional 10% of their base. About half the corn growers took advantage of this option, so in effect about 25% of the national corn
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policy Table 1. 1 2 3a 3b
Three components
of the 1988 corn programme. $115/metric ton $45lmetric ton $70/metric ton 20% 10% tic’ $68/metric ton
Target price Maximum defiency payment Loan rate Acreage reduction Paid land diversion
base was set aside in crop year 1988. Almost 90% of corn growers participated in the 1988 government programme. The other 10% had no limits on their production, but they sold their entire output at the prevailing world market price. Table 1 lists the provisions of the 198X programme available to corn growers. Table 2 then shows the participation options a corn grower confronted and illustrates the differences in outcome under strong and weak world market price scenarios. The Secretary of Agriculture has considerable discretion in administering the farm programmes. One of his most important decision variables is the amount of acreage to set aside in any given crop year. The international market strengthened following the severe drought in the USA in the summer of 198X. As a result there has been a significant reduction in the size of inventories of grain in government hands. These stocks were released back into the marketplace, thereby preventing market prices from rising more than they did in 1988. As a result of the drawdown in stocks that occurred, it was not necessary to run as large an acreage reduction programme in 1989. The Secretary of Agriculture therefore set the acreage reduction required to participate in target price and loan rate programmes in 1989 at only 10% instead of the 20% required in 1988. Furthermore, he offered no payments to divert more land from production than the basic 10%. This management of the programme helps to ensure that the USA has plenty of grain available to meet its commitments in both the national and the international markets. The set-aside land is, in a sense, another ‘reserve’ to ensure the reliability of the USA as a supplier to the world market. 3For more detail see ibid, pp 112-l 14, and Lewrene Glaser, Provisions of the Food Security Act of 7985, Economic Research Service, Washington, DC, USA, 1986.
1985 Farm Bill The essential
elements
of US grains policy have been reviewed.’
Table 2. Options available to a corn grower under the 1988 farm programme, under strong and weak world market price scenarios.
Let us
and outcomes
Farmer has 100 ha corn land with a five-year average yield of 7.5 metric tons/ha (mtfha), but due to drought harvests 6 mt/ha. Option 1
Option 2
Plant 100 ha and rely on market for income: 100 ha x 6 mVha = 600 mt.
Plant 80 and receive price plus income assurance: 80 ha x 6 mffha = 480 mt.
Scenario 1: $6O/mf world price From sale in market farmer realizes: 600 mt x $60 = $36 000.
Scenario 2: $720/mt world price From sale in market farmer realizes: 600 mt x $120 = 572 000.
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Farmer receives loan at harvest: 480 mt x $70 = $33 600. He also receives deficiency payment: 60 ha x 7.5 mtfha x $45/mt = $27 000. Total receipts = $60 600 and government keeps the corn.
From sale in market farmer realizes: 480 mt x 5120 = $57 600 He must repay loan with interest. He receives no deficiency payment.
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now examine more specifically the Food Security Act of 1985 and how it moved the US grains sector in a more market-oriented direction. We will focus on six key outcomes of that farm bill. Loan rates In the 1981 Farm Bill US loan rates were set in law at levels that turned out to be too high during the period of the extremely strong dollar. As a result the export competitiveness of US grain was severely eroded. Instead of being exported at a competitive price, it tended to be purchased by the Commodity Credit Corporation and to accumulate in government stocks. This led to larger and larger acreage reduction programmes and further reductions in exports. By this means the USA unilaterally supported the whole world market price structure at its loan rates. When Congress wrote the 1985 Farm Bill the most important objective was to restore the international competitiveness of US farm exports. To this end Congress changed the basis by which the loan rate is established for each important export commodity. Instead of fixing the loan rate in law as had been done in the 1981 Farm Bill for crop years 1982 through 1985, Congress established a formula for determining the loan rate. In the future the loan rate will be set at 75% of a five-year moving average market price, dropping the high and low years. This means that the loan rate will be permitted to move up or down with long-term trends in the market. In normal years the international price will be above the loan rate so that the loan rate will not interfere with international competitiveness. But the loan rate will still be there as a safety net in a year of bumper crops and weak market conditions which might unduly depress the price of the commodities. During a transition period Congress placed a limit on how quickly the loan rate could be dropped to that determined by the formula. The loan rate was permitted to fall 25% in 1986 and since then has been stepped down at about 5% per year in the direction *of the formula. This reduction in the loan rate was an extremely important change in agricultural policy. The change moved US export commodity sectors far in the direction of market orientation and demonstrated the large commitment of the USA to servicing the international market as a dependable, competitive supplier. Deficiency payments In the early 198Os, during the period of declining farm exports, severe downward pressure was placed on the value of farm assets. National average farm land prices fell by 30% in five years, and land prices fell by over 60% in the Corn Belt. This caused severe financial stress on farmers and large numbers of farm bankruptcies. In order to sustain the cash flow of the farm sector to help keep down excess debt and to avoid further farm bankruptcies, the Congress froze target prices for one or two years, depending on the commodity. With the 25% reduction in loan rates that occurred, this meant a significant short-term increase in the budget cost of farm programmes even in a period of increasing concern about the need to reduce the federal budget deficit. Nevertheless, Congress accepted that loan rates had to fall in order to restore the international competitiveness of US farm exports, and at the same time that target prices had to be frozen in order to sustain the cash
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flow of the farm sector. This permitted many farmers to pay off a substantial amount of debt and helped other farmers avoid bankruptcy. Today the financial health of the US farm sector is much improved, and the 1985 Farm Bill permitted nominal target prices to decline 10% over the period 1988-90. This is reducing the budget cost of the farm programme automatically now that the worst problems of farm financial stress are over. Conservation The 1985 Farm Bill provided a major commitment to improved soil conservation measures. Past agricultural policy had induced farmers to plough up fragile soils in order to expand their crop acreage base. The 1985 Farm Bill established a conservation reserve programme in which farmers are paid to retire fragile lands from production for a minimum of 10 years. The government provides an annual payment to farmers for them to set aside this land and compensates farmers for half the cost of establishing a cover crop or planting trees on that land. The conservation reserve is authorized to go up to 18 million ha of land. More than three-fourths of this target have been reached already. As more land goes into the conservation reserve, less land needs to go into the annual acreage reduction programmes. As a result, more of the national agricultural output is occurring on the more productive and less erodible soils. An important effect is to concentrate more production in lower-cost producing areas, thereby contributing to greater international competitiveness, while reducing soil erosion. In addition, to qualify for any government farm programme payments in the future, farmers will be obliged to follow good soil conservation practices. Payments in kind The 1985 Farm Bill authorized payments in kind in lieu of cash to pay for a number of farm programme provisions including deficiency payments, land diversion payments, disaster payments, conservation reserve payments and export subsidies. The motivation of Congress to provide payments in kind was to circumvent the budget constraint and permit larger income transfer to farmers in a period of severe financial stress. But the payments in kind also had a very important impact on keeping the grain markets liquid and ensuring that US grain prices were at internationally competitive levels. As indicated above, the release price on inventories of grain in the farmer-owned reserve is 140% of the loan rate at which that grain entered the reserve. The release price on Commodity Credit Corporation stocks of grain is 115% of the farmer-owned reserve release price. So the pre-1986 reserve stocks of grain had unrealistically high release prices relative to market conditions after the loan rate was dropped by 25% in 1986. By making payments in kind the CCC was able to release reserve stocks of grain back into the marketplace at current market value rather than at those unrealistically high release prices. This did indeed bring the US price of grain down to an internationally competitive level and thereby helped to get grain exports moving once again. It had the additional benefit, of course, of providing larger income transfers to US farmers and helped, by that means, to accelerate their recovery from the financial stress of the early 1980s. (See the Appendix for more detail on payments in kind.)
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Decoupling The 1985 Farm Bill made an important beginning at decoupling payments to farmers from current and future production. Decoupling has attracted a lot of interest in recent years because there is a widespread perception that many countries’ farm policies induce overproduction in high-cost or inefficient producing areas because government payments or subsidies are linked to the volume of production. By expanding production capacity, a farmer is able to qualify for larger farm programme benefits in the future. This tends to induce expansion into high-cost producing areas which otherwise could not compete in the international market in the absence of the subsidies. If payments are decoupled from current and future production, this incentive to inefficient production should be removed. Some observers suggest that before 1985 US target prices and deficiency payments had induced larger production than would otherwise occur in high-cost producing areas and were thereby contributing to surplus production that ended up in government stocks because it could not be sold overseas at a competitive price. Two small steps in the direction of decoupling payments from production were made in the 1985 Farm Bill. The first of these was the so-called 50-92 provision, which was later extended to G92 in 1986. Under this provision a farmer can receive 92% of his deficiency payment even if he plants none of his acreage base. This provision is only attractive to farmers in higher-cost producing areas, and the objective was to induce retirement of less-efficient producing areas from production in order to permit a larger fraction of the production to occur in lower-cost and therefore more competitive producing areas. The second manner in whch decoupling was initiated in the 1985 Farm Bill was in the form of an effective freeze on the historical acreage base and a reduction of about 10% in the programme payment yield per hectare (on which deficiency payments are based) from the 1985 level. As a result the loan rate or the expected market price, whichever is higher, should determine how much inputs a farmer purchases to apply to each hectare of land. In effect this changed the supply-inducing price from the target price to the higher of the loan rate or expected season average price. The result should be some reduction in the intensity of production on each hectare of land and therefore some modest reduction in the unit cost of production.
Other provisions The 1985 Farm Bill made a number of tough decisions in moving US agriculture in a more market-oriented direction. In addition to the changes described above for exportable commodities, it also started the difficult process of moving some import-competing sectors of US agriculture in a more market-oriented direction. One of the most politically difficult parts of agricultural policy is that affecting the dairy sector. Dairy farmers and dairy cooperatives are an extremely powerful group. Nevertheless, the problem of excess dairy production was attacked by two means. In the first two years of the 1985 Farm Bill the government paid farmers to slaughter 8% of the national dairy herd in order to help reduce excess capacity. In addition, an automatic trigger was put in effect to reduce the support price of milk by 1.1 c/kg for each year in which CCC purchases of butter, cheese and powdered milk are projected to exceed a relatively low trigger level. FOOD POLICY June 1990
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So, in summary, the 1985 Farm Bill provided an important turning point in US agricultural policy. It recognized the fundamental importance of exports to the economic health of the farm economy and made a firm commitment to protect the international competitiveness and dependability of supply of the USA to that international market. It did this by setting in motion significant movements in the direction of a market orientation and in the meantime provided substantial assistance to farmers to facilitate their transition back to economic health.
Looking towards the future The 1985 Farm Bill will guide agricultural policy through the 1990 crop year. Therefore the debate over future directions in US agricultural policy is well underway. It is important to remember that while the Bush administration will propose changes in farm policy, it is the Congress that writes the legislation. There is considerable inertia in present farm policy, and there is great inertia in the membership of Congress, particularly in the House of Representatives. Members of Congress understand how the present policy instruments work in practice, and they tend to be very cautious about adopting new or untested instruments. Furthermore, the commodity organizations are generally content with the present policy instruments. Taken together these forces exert pressure to continue the present policy measures even if the levels at which those policy instruments are set is changed. The administration’s most important role in farm policy is less in drafting the legislation than it is in implementing the legislation that is passed by Congress. The Congress usually provides a considerable amount of discretion to the Secretary of Agriculture to set the various policy instruments within rather broad parameters. Therefore the implementation decisions taken by the Bush administrative will set the tone of agricultural policy. The Bush administration can be expected to advocate staying the course with the 1985 Farm Bill, continuing to reduce loan rates until they reach the formula determination described above. Preserving the international competitiveness of US agriculture by keeping loan rates moving towards the formula will probably be an important Bush priority. The Bush administration will also probably put high priority on making progress in the multilateral trade negotiations to reduce production-distorting and trade-distorting agricultural subsidies around the world, to convert non-tariff agricultural import barriers to tariffs, and to set these on a downward trajectory. Bush has made it clear that he will not advocate unilateral disarmament by the USA in agricultural policy, but he will be willing to negotiate a generalized reduction in agricultural subsidies and trade barriers in order to level the playing field around the world. He would expect the USA to participate by reducing its own subsidies and trade barriers in concert with the concurrent reductions by other countries. As indicated above, significant redesigning of the instruments employed in agricultural policy is not likely in the 1990 Farm Bill. The only situation in which any substantial changes in US agricultural policy can be expected would be in the context of a GATT agreement for a simultaneous multilateral reduction in the level of subsidies to all
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commodities around the world. Even in this case the main change would probably be in the form of a faster reduction in deficiency payments rather than a fundamental modification of the nature of the policy instruments. The environment is propitious for progress in this GATT Round for reducing subsidies that distort production, and in turn, trade in agricultural commodities. Therefore ‘unilateral disarmament’ in the 1990 Farm Bill in advance of the GATT Round agreement will not occur. The other important factor that will affect future farm policy in the USA is the urgent need to reduce the federal budget deficit. Agricultural programme payments were the fastest-growing element in percentage terms in the federal budget in the first six years of the 1980s. However, since 1986, as exports have recovered and market conditions improved, the cost of US farm programmes has fallen by over half and represents the fastest-declining component of the federal budget. Nevertheless, after the substantial assistance that agriculture has received from the government in the 198Os, it is reasonable that agriculture participate in deficit reduction in the early 1990s. The effect of this on future farm programmes is likely to be in the form of greater pressure to reduce deficiency payments at a faster rate than would otherwise occur. In practice, this is likely to be translated into either faster reduction in target prices or reducing the volume of production on which deficiency payments may be made below today’s level. At the same time, Congress will attempt to provide more flexibility to farmers in their cropping decisions on acreage for which no deficiency payments are paid.” Concerning acreage reduction, at least 16 million ha of land will probably enter the conservation reserve. There may be some discussion of expanding the conservation reserve beyond that level in the 1990 Farm Bill, but evaluation of the supply-demand balance suggests that will not be merited. Furthermore, once at least 16 million ha enter the conservation reserve there should be no need for much annual acreage reduction by participants in the commodity programmes in normal years. More debate in 1990 is likely to focus on ensuring water quality and food safety than on the commodity programme provisions.” In summary, the USA made a major change in direction in agricultural policy in the 1985 Farm Bill. Both Congress and the commodity organizations appear to be satisfied in most instances with the way the 1985 Farm Bill is working. Any significant changes will be driven by budget considerations or a multilateral agreement to reduce subsidies in the GATT negotiations. agricultural
4For a more detailed discussion see Robert L. Thompson, ‘The 1985 Farm Bill as the basis for future farm legislation’, in Kristin Allen, ed, Agricultural Policies in a New Decade, National Center for Food and Agricultural Policy, Resources for the Future, Washington, DC, USA, 1990. ‘For more detail see Robert L. Thompson, ‘A farm and rural policy for the 199Os’, in Mark Drabenstott, ed, Positioning Agriculture for the 1990.x A New Decade of Change, National Planning Association, Washington, DC, USA, 1989, pp 133-l 42.
Appendix Payments in kind In 1982 the loan rate for exportable commodities like corn was set too high, given the large US crop, the weak world market demand and the very strong US dollar. Therefore CCC inventories grew rapidly, and in January 19X3 the USDA determined that massive set-asides of land would be required in 1983 to avoid even larger
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stock accumulations. The USDA decided to pay farmers in kind, ie with physical inventories of grain instead of cash, to set aside some 30 million ha of land in 1983. The 1983 experience demonstrated that it is inefficient to make payments to close to 2 million individual farmers with physical grain. Furthermore, it is
expensive to physically move grain around the country from where it is stored to where payment is needed. Therefore, when the 198.5 Farm Bill authorized payment in kind for mumerous components of US farm policy, it was decided to effect such payments by means of ‘generic payment-in-kind certificates’. The cer-
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tificates are denominated in dollars and are freely transferable. There is no limit to the number of transfers. The certificates have an eight-month life and can be redeemed by the farmer for cash in the last two months before expiration. In their first six months of life, however, the certificates can be redeemed by a farmer for commodities he has under a price support loan, or they can be redeemed by anyone for commodities owned by the CCC. Certificates are generic in the sense that they are denominated in dollars and can be redeemed for any commodity in the CCC’s inventory. The motivation for using dollardenominated, transferable certificates is that it is much more efficient and cheaper to move pieces of paper around the country than to move physical grain to the point where payment must be made. When the programme started it was hoped that a market would develop for the certificates so that only commodity firms or large users of commodities would redeem certificates for government-owned inventories. For example, a grain company could buy up enough certificates to load a whole unit train of corn from a CCC warehouse. To accomplish this the CCC regularly published a catalogue listing
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the volume of each commodity it had available for release at each location. Large volume handlers of certificates could then ‘buy’ that grain out of CCC inventories at current market value, not at the much higher official release price. This increased the liquidity in the marketplace and ensured that the US price of exportable commodities like corn would be kept at competitive levels. Certificates could also be used by farmers to redeem their own grain under a price support loan to the CCC. Again, the USDA’s objective was to get that grain back into the marketplace or available for farmers’ own use in feeding livestock or poultry. For this purpose farmers could use both certificates they had received as payment from the government and certificates that they themselves had bought in the market from other farmers. Because certificates are denominated in dollars, some per-unit redemption price was needed to translate dollars into units of commodity. Therefore the USDA established a posted county price (PCP) for each exchangeable commodity for each business day. Each county’s PCP of grain was based on some terminal cash price the previous day less a fixed differential to
each county based upon transportation costs. For example, assume that on a given day the posted price in a county was $55 per metric ton, but the loan rate received by the farmer was $72. By using certificates to redeem the grain he had under loan, the farmer could realize a gain of $17 per ton. With this big a differential it is no wonder that a market developed which paid a premium for certificates. On the same day as this example occurred the market for certificates was paying 112-116% of face value. This increased the value of government farm programme benefits to those farmers who sold their certificates. The other farmers who bought certificates to redeem grain they had under loan also came out ahead. Since the autumn of 1988 there has been realtively little use of certificates because CCC inventories are much smaller as a result of the drought and grain markets are much stronger. In addition, the legislated release price for grain that has entered CCC inventories since 198.5 is much more reasonable relative to current world market prices. While it is impossible to predict at this time, there is some chance that payment-in-kind authority may be eliminated in the next farm bill.
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