Order Code RS20848
Updated September 14, 2001
CRS Report for Congress
Received through the CRS Web
Farm Commodity Programs: A Short Primer
Geoffrey S. Becker
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Summary
The U.S. Department of Agriculture (USDA) is required, primarily by the Federal
Agriculture Improvement and Reform ((FAIR) Act of 1996, to provide income support,
price support, and/or supply management for approximately 20 specified agricultural
commodities. Comprehensive farm legislation in 1996 was intended to usher in a new
system of price and income supports for many of these commodities by accelerating the
shift toward a more “market-oriented” agricultural policy and by gradually reducing
financial support. However, unanticipated declines in export markets and in farm prices
led Congress to enact a series of supplemental measures from 1998 through 2001 that
provided additional ad hoc support for producers, greatly increasing the cost of
commodity assistance. Continued market uncertainties, high federal spending, and the
expiration, in 2002, of many provisions of the 1996 act, all make these programs the
subject of intense debate in the 107th Congress.
Overview
USDA farm support programs represent the heart of U.S. farm policy, by virtue of
their longevity – they have existed since the early 1930s – and their cost. Net outlays for
the Commodity Credit Corporation (CCC), USDA’s financing mechanism for the
programs, are expected to average more than $15 billion annually between FY1996 and
FY2002, with FY2000 outlays at a historical record of $32.3 billion.1
Standing authority for USDA-CCC programs is provided mainly by three permanent
laws: the Agricultural Adjustment Act of 1938 (P.L. 75-430), the Agricultural Act of 1949
(P.L. 81-439), and the CCC Charter Act of 1948 (P.L. 80-806). However, Congress
frequently alters or suspends many provisions of these laws through omnibus, multi-year
farm acts, and various budget measures. The most recent omnibus law, intended to guide
program operations through 2002, is the 1996 Federal Agriculture Improvement and
Reform Act (P.L. 104-127). “Emergency” farm funding laws since then, notably sections
1 The Department’s Farm Service Agency (FSA) delivers commodity program benefits through a
network of local (“county”) offices overseen by committees of elected farmers.
Congressional Research Service ˜ The Library of Congress

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of P.L. 105-277, P.L. 106-78, P.L. 106-224, and P.L. 107-25, have increased support
(generally temporarily) for most major commodities.
Current law requires the Secretary of Agriculture to offer support for wheat, feed
grains (corn, sorghum, barley, oats), cotton (upland and extra-long staple–ELS), rice,
soybeans and other oilseeds (sunflower seed, canola, rapeseed, safflower, flaxseed,
mustard seed), milk (dairy), peanuts, sugar, and tobacco. Most of these, plus several
others (primarily wool, mohair, honey, cranberries, and apples), also have been eligible for
additional ad hoc support under the supplemental measures that Congress enacted in
1998-2001, in response to export market losses and low farm prices.2
The commodities eligible for mandatory support under standing legislation accounted
for approximately $68 billion, or 35%, of all cash receipts from farm marketings in 2000.
Other commodities that normally receive no direct support include meats, hay, poultry,
fruits, nuts, and vegetables, which together generated farm receipts estimated at $127
billion in 2000. But even producers of these items can be affected by farm policy
decisions, either because such producers also raise some price-supported commodities, or
because Government intervention in one farm sector can influence production and prices
in another sector.
Statutorily Required Support
Policymakers have devised a variety of program methods for the CCC to assist
producers; generally, each was designed to achieve one of three broad objectives:
! To supplement farmer incomes. Methods include production flexibility
contract payments for grains and cotton, and marketing loans and loan
deficiency payments for grains, cotton, and oilseeds (recent legislation
has provided ad hoc direct payments and/or loan benefits for wool,
mohair, oilseeds, tobacco, honey, milk, peanuts, apples, and cranberries);
! To manage supplies. Marketing quotas/acreage allotments, for tobacco,
and poundage/marketing quotas, for peanuts are used to restrict output;
! To support farm prices. Methods include nonrecourse marketing loans
for grains, cotton, sugar, peanuts, tobacco, and oilseeds, and commodity
purchases for milk (recent legislation has provided ad hoc loans for
mohair and honey and direct purchases of various fruits and vegetables).
The supports employed, levels of aid, and impacts on taxpayers, consumers, and other
producers, differ among the commodities. Some commodities are supported by only one
method; others receive their support through a combination of program tools.
2 Most of this ad hoc support has been for one or two crop or marketing years only, and did not
permanently alter standing legislation (e.g., the 1996 farm law). Most of these measures also
provided separate funding for disaster-related losses. See CRS Report RL30794, Farm Economic
Relief and Policy Issues in the 106th Congress: A Retrospective, and CRS Report RL31905,
Emergency Spending for Agriculture: A Brief History of Congressional Action, FY1989-2001.

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Wheat, Feed Grains, Upland Cotton, and Rice. These programs were
overhauled in 1996. No longer would payments be tied to market prices (“target price
deficiency payments”), to the planting of a specific crop, or to annual cropland diversion
requirements. Instead, most eligible producers (those with acreage enrolled in the old
grains and cotton annual programs) signed production flexibility contracts entitling them
to fixed, but generally declining, annual payments for 7 years. These payments, totaling
nearly $36 billion nationally through 2002, are based on each participant’s established
acreage and yield (per-acre output) under the old programs. However, participants can
plant almost any combination of crops on contract acreage. The only other restrictions are
that contract land must be used for agricultural purposes, generally fruits and vegetables
cannot be produced on such land, and conservation rules must be followed.
Those with the contracts also are eligible for nonrecourse marketing assistance
loans, and loan deficiency payments. To qualify, a farmer pledges the stored crop as
collateral. Loan rates generally are set at 85% of a moving average of past market prices;
there are caps and (for some) floors on these rates. For 2001 crops, USDA announced
national average loan rates of $2.58 per bushel (bu.) for wheat, $1.89 per bu. for corn,
51.92 cents per pound (lb.) for upland cotton, and $6.50 per 100 pounds (cwt.) for rice.
Nonrecourse loans must be repaid with interest within 9 months (10 months for
cotton) or else the producer forfeits the pledged commodity to the government, which has
“no recourse” other than to accept it in lieu of money. However, two provisions are
intended to make forfeitures – and buildup of CCC-owned surpluses – less frequent than
under past policy. First, the “marketing loan” provision enables the farmer to repay the
loan at a USDA-calculated rate that is intended to approximate market prices. If that
repayment rate is below the original USDA loan rate, the farmer captures the difference
as a subsidy (marketing loan gain). Loan deficiency payments (equal to marketing loan
gains) also are made to eligible producers choosing not to take out a crop loan. Second,
the 1996 law instructs USDA to set loan rates at levels that will minimize forfeitures.
Supplemental legislation (P.L. 105-277) effectively increased payments to contract
holders by approximately 50% in 1998. Later, P.L. 106-78, P.L. 106-224, and P.L. 107-
25) roughly doubled the payments in 1999, 2000, and 2001. These extra market loss
assistance payments were exempted from regular annual payment limits (see page 5). P.L.
106-224 also extended loan deficiency payment eligibility – for the 2000 crop year only
– to anyone who grew a contract commodity, not just contract holders. (See CRS Report
RS20271, Grains, Cotton, and Oilseeds: Federal Commodity Support.)
Soybeans, Other Oilseeds, and ELS Cotton. Producers of these commodities
are not eligible for the 7-year contracts, but can receive nonrecourse marketing assistance
loans and loan deficiency payments. USDA set average 2001 rates at $5.26 per bu. for
soybeans, $9.30 per cwt. for most other oilseeds, and about 80 cents per lb. for ELS
cotton. The “emergency” farm bills also provided supplemental direct payments to
soybean and other oilseeds producers, sharing a total of $475 million for 1999, $500
million for 2000, and $424 million for 2001.
Tobacco and Peanuts. These commodities are supported through a combination
of nonrecourse loans and supply controls. The tobacco program, intended to be operated
at no net government cost, employs the most aggressive supply control: all sales of major
tobacco types are strictly limited to farms with marketing quotas. Under the peanut

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program, marketing quotas (formally called poundage quotas) limit the quantity of peanuts
that can be marketed for domestic edible use; such peanuts are eligible for a higher loan
rate than above-quota (“additional”) peanuts, which must be crushed for oil or feed, or
exported. Each year, a nationally-set quota is established and then allocated among
eligible producers. The loan rate for quota peanuts is set by law at $610 per ton; by
contrast, the 2001 rate for above-quota peanuts is $132 per ton. Because the supply
control features of the peanut and tobacco programs keep market prices higher than they
would otherwise be, consumers rather than taxpayers generally bear most program costs.
However, three of the supplemental measures (P.L. 106-78, P.L. 106-224, and P.L. 107-
25) are to provide special direct payments totaling, over 3 years, about $143 million for
peanuts and $797 million for tobacco. (See CRS Issue Brief IB95118, Peanuts: Policy
Issues; and CRS Report 95-129, Tobacco Price Support: An Overview of the Program.)
Sugar. Support no longer includes the supply control mechanism of the pre-1996
program but still is supposed to operate, in effect, at no net cost to the Government. Until
2000, price support was provided through a nonrecourse/recourse loan mechanism,
combined with restrictions on sugar imports. Only recourse loans (which must be repaid
in cash, with interest) were available to sugar processors whenever annual imports were
below 1.5 million tons. Whenever imports exceeded 1.5 million tons, nonrecourse loans
would be triggered. However, the FY2001 USDA appropriation (P.L. 106-387) now
requires that all sugar loans be nonrecourse, regardless of import levels. Loan rates are
18 cents per lb. for raw cane sugar and 22.9 cents per lb. for refined beet sugar. (See CRS
Issue Brief IB95117, Sugar Policy Issues.)
Milk. Milk price support is provided through surplus commodity purchases from
processors. The CCC buys all bulk quantities of cheese, butter, and nonfat dry milk that
dairy processors are unable to sell on the private market for at least the prices offered by
the CCC. Per-pound prices are set so that processors will in turn pay farmers a price for
their milk that reflects at least the federally mandated support price, currently $9.90 per
cwt. The program was to be replaced after 1999 by recourse loans for processors, but
USDA appropriation measures have extended the old program through calendar 2001.
In addition, two of the supplemental aid laws authorized direct payments to dairy farmers
totaling nearly $600 million. (See CRS Issue Brief IB97011, Dairy Policy Issues.)
Other Commodities. Several crops and animal products that either are not
typically supported through the CCC, or had lost their “mandatory” support after the 1996
farm law, were made temporarily eligible for support under one or more of the
supplemental farm laws. The 2000 honey crop is eligible for nonrecourse marketing
assistance loans (set at 65 cents per lb.) as well as loan deficiency payments. Wool and
mohair are eligible for direct payments of 20 cents per lb. for 2000 marketings; the rates
for 1999 marketings were 20 cents for wool and 40 cents for mohair. P.L. 107-25
authorized more payments for 2001. In addition, mohair produced before or during
FY2000 was eligible for recourse loans set at $2 per lb. (Congress earlier had terminated
support for honey, wool, and mohair.) Apple and cranberry producers were to receive
one-time direct payments totaling $100 million and $20 million, respectively, to cover past
crop market losses. USDA was directed by P.L. 106-224 to purchase $200 million in
various fruits and vegetables experiencing low 1998 and 1999 crop year prices. And,
P.L. 107-25 directs USDA to distribute $133.4 million in block grants among states, to
be used for supporting specialty crops (which include fruits and vegetables).

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USDA Discretionary Support
In addition to the explicitly-required forms of support described above, federal law
has long permitted the Secretary to offer, at his or her discretion, support for virtually any
farm commodity. Recent examples of such support announced by the Secretary include
direct payments of up to $10 per head for hogs in 1999, and of up to $8 per head for
lambs (under a 3-year lamb meat adjustment assistance program). In 2000, the Secretary
decided to make direct purchases of surplus sugar, and also to transfer title to 277,349
short tons of CCC-owned sugar to farmers who agreed to destroy nearly 102,000 acres
of planted sugar beets. (Another such sugar program was set for fall 2001.) Funds for
these various activities can come from a number of sources, including CCC and Section
32.3
Payment and Loan Limitations
Most farm subsidies have been tied to commodity units; therefore, higher output
means higher potential benefits, up to certain limits. The law sets an annual ceiling for
production flexibility contract payments at $40,000 for each person, who must be actively
engaged in farming. The law sets a separate annual ceiling for gains from marketing loans,
at $75,000 per person; thus a person potentially could receive up to $115,000 per farm.
However, because an individual can receive half-payments on two additional farms, the
effective annual cap on total combined payments actually has been $230,000 per person.
Because limits apply to individuals rather than farm units, a single farm with multiple
owners/operators might receive much more than the above amounts. Also, there is no per-
person monetary limit on outstanding CCC loans or on surplus purchases.
As noted, the special market loss payments provided by the supplemental farm laws
are not subject to any payment limitations. Also, the loan payment cap threatened to
undermine use of marketing loans for recent crops by encouraging farmers to default on
their nonrecourse loans. Consequently, the limit on loan gains for 1999, 2000, and 2001
crops was doubled to $150,000 per person by P.L. 106-78, P.L. 106-387, and P.L. 107-
25.
Policy Discussion
When the commodity programs were first authorized in the early 1930s, most of the
Nation’s 6 million farms were diversified and small (by today’s standards). There was a
perceived need to address the severe economic problems then faced by this large segment
of society, where about 25% of the U.S. population then resided. Moreover, it was
argued, stabilizing the agricultural sector – through guaranteed minimum farm prices,
income payments to producers, and/or various supply management techniques – also
helped to ensure an abundant supply of food and fiber at reasonable prices in the future.
3 Section 32 is a permanent appropriation that earmarks the equivalent of 30% of annual customs
receipts to support the farm sector through a variety of activities. Most of this appropriation (now
about $5.7 billion per year) is simply transferred directly to USDA’s child nutrition account to fund
school feeding and other programs. However, Section 32 also provides USDA with a source of
discretionary funds of up to $300 million annually, which it uses for "emergency removals" of
surplus agricultural commodities, disaster relief, or other unanticipated needs. See CRS Report
RS20235, Farm and Food Support Under USDA’s Section 32 Program.

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Since then, farming has undergone significant change. Most commercial agriculture
is now confined to fewer, larger, and more specialized operations. In 1997, about 157,000
large farms, with annual agricultural sales averaging about $900,000, accounted for 8%
of all U.S. farms but 72% of all farm sales. Most of the nation’s 2 million farms are
primarily part-time, where operators rely on off-farm earnings for most of their income.
Farm residents now account for less than 2% of the general U.S. population.
Also, the economic health of the farm sector has become increasingly tied to overseas
markets, where there are not only more sales opportunities for U.S. farmers but also stiff
competition from foreign producers – who themselves may be protected by subsidies or
import barriers. Critics have long argued that U.S. commodity policies are outdated and
may even be detrimental to the needs of modern agriculture, and of society in general.
While the programs have retained features dating to the 1930s, they also have evolved –
in response both to the changes occurring in agriculture and the economy, and to fiscal and
political pressures. A major point of contention has been whether they have evolved
quickly enough, or in the most appropriate ways.
Congress and the Administration have sought for many decades to steer price and
income support programs onto a more “market-oriented” course, so that producers would
look to the private market rather than the Government for economic rewards from
production agriculture. A succession of farm bills, particularly since the 1970s, moved
farm policy in this direction, mainly through incremental changes in existing programs.
The 1996 farm law, written at a time of high farm prices and expanding exports, was
aimed at accelerating the programs’ market orientation.

CCC net outlays averaged $15 billion yearly during the 1980s, peaking at $26 billion
in fiscal year 1986. By the 1990s, improved market conditions, plus program reductions
mandated by various farm and omnibus budget laws, had lowered CCC outlays to an
average of nearly $10 billion yearly between fiscal years 1990 and 1995. The 1996 farm
law anticipated even lower spending, at an average of less than $6 billion yearly.

However, unanticipated declines in export markets and in farm prices not only drove
up the cost of the programs already authorized by the 1996 farm law (primarily marketing
loans and loan deficiency payments), but also led Congress to enact, between 1998 and
2001, more aid. Approximately $30 billion in emergency farm and related assistance has
been approved, of which some $22 billion was in response to falling commodity prices (the
rest was natural disaster aid). For calendar 2000, direct farm payments reached a total of
$24 billion – a figure representing over one-half of net farm income for the year. CCC net
outlays for all farm-related programs and activities reached a record $32.3 billion in fiscal
year 2000 and are estimated at $20.5 billion in FY2001.
Such record-high subsidies have helped the farm economy as a whole remain in
relatively strong financial condition. However, most policymakers and farm groups would
prefer a more reliable method for supporting farm income than ad hoc laws; some are
pushing for policy changes that will automatically release funding when farm income is not
sufficient to maintain viability. Allocating resources for such changes, and resolving
ideological differences over the best method of assisting farmers, are likely to be difficult.
These issues are at the heart of the debate over current programs, most of which expire
in 2002.

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