Order Code RS20913
Updated March 7, 2002
CRS Report for Congress
Received through the CRS Web
Farm “Counter-Cyclical Assistance”
Geoffrey S. Becker and Jasper Womach
Specialists in Agricultural Policy
Resources, Science, and Industry Division
Summary
Congress is now considering reauthorization of major farm income and commodity
price support programs that expire after crop year 2002. Many agricultural interests
expect that a new “counter-cyclical assistance” program will be an integral component
of future farm policy. The intent of counter-cyclical assistance is to provide more
government support when farm prices and/or incomes decline, and less support when
they improve. Farmers already receive federal aid that is counter-cyclical. Although
differing in detail, omnibus farm bills passed in October 2001 by the full House and in
February 2002 by the Senate Agriculture Committee create additional aid as a long-term
and guaranteed source of counter-cyclical support for grains, cotton and oilseeds. This
aid would be in the form of deficiency payments tied to target prices for each crop.
Background
Farming often is characterized as a “cyclical” business with exaggerated price swings
that are destabilizing. Farmers respond to high prices by boosting output. However, when
prices drop, farmers are not quick to cut back production. They are more likely to operate
at a loss and draw down resources. Contributing to the unstable nature of the farm
economy are the weather, export demand, currency exchange rate fluctuations, and the
farm support and export subsidy programs of foreign competitors.
Typically, farmers do not view the eventual self-correcting character of commodity
prices and production with the same equanimity as economists. In fact, U.S. producers
of the major crops have asked for and received federal intervention – including various
forms of counter-cyclical assistance – to support their commodity prices and incomes for
nearly the past 70 years.
Prior to the current farm law, the Federal Agriculture Improvement and Reform Act
of 1996 (P.L. 104-127), a prominent form of counter-cyclical aid was deficiency payments
linked to target prices. Congress specified, for each major crop, an annual per-unit target
price (e.g., $4 per bushel for wheat). If, as often occurred, the market price was below the
target price, eligible producers received a deficiency payment to make up the difference.
Congressional Research Service ˜ The Library of Congress

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Provisions of Current Law
Under Title I of the 1996 Act fixed production flexibility contract (PFC) payments
replaced target price deficiency payments. These payments began at about $5.6 billion in
1996 and gradually have declined, to about $4 billion in 2002, for a 7-year total of about
$36 billion. The PFC payments are not linked to either current production or prices. By
design, lawmakers intended that these fixed payments, along with the freedom to make
unconstrained planting decisions, would cause the marketplace rather than subsidies to
guide farmers’ production choices.
However, the 1996 law did continue another form of counter-cyclical support:
marketing assistance loans. Producers can pledge their stored grain, cotton, or oilseeds
as collateral for a U.S. Department of Agriculture (USDA) nonrecourse commodity loan
after harvest. These loans are based on a per-unit rate (i.e., $2.58 per bushel for wheat).
In earlier years, these nonrecourse loans were set higher than market prices in order
to support farm incomes, and farmers forfeited the commodities pledged as collateral at
the end of the loan term (about 9 months). Under the more recent design, farmers can
repay the nonrecourse “marketing assistance loans” at less than the original loan rate when
market prices are lower than that loan rate. The difference between the USDA loan rate
and the lower repayment rate (times the number of bushels under loan) constitutes the
federal subsidy. In addition, those producers who do not take out USDA commodity
loans can instead receive the equivalent subsidy as a direct payment, called a “loan
deficiency payment” (LDP). The federal subsidy (either a loan gain or LDP) increases as
market prices drop below the loan rate, and the subsidy diminishes as prices rise – thus,
the “counter-cyclical” nature of the marketing loan program.
When the 1996 farm bill was passed, commodity prices were relatively high, and
policymakers widely anticipated that the PFC payments, when combined with whatever
was earned from the market, would provide sufficient income to producers. Marketing
loans were set at relatively low rates so that they only would be needed as a safety net if
prices declined relatively steeply. However, by the late 1990s, major commodity prices
declined steeply, and did not recover to generally profitable levels. As a result, marketing
loan benefits, close to zero in FY1996 and FY1997, jumped to over $8 billion by FY2000
and are estimated at $6.3 billion for FY2001.1
Congress determined that the “safety net” provided by the 1996 FAIR Act (i.e.,
marketing assistance loans and fixed PFC payments) was inadequate, and supplemented
the benefits with additional, emergency “market loss payments.” These payments, mainly
to PFC enrollees, added about $3 billion in FY1999, $11 billion in FY2000, and $5.5
billion in FY2001 to program costs. These supplemental payments also can be
characterized as counter-cyclical – even though they are ad hoc and not “programmed”
into standing law – because they are being made (according to the sponsors) in response
to low prices and incomes.
1 Marketing loan benefit level data are from CCC, Commodity Estimates Book, April 2001.

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New Counter-Cyclical Proposals
Under the separate farm bills passed on October 5, 2001, by the House and on
February 13, 2002, by the Senate, new counter-cyclical measures would be built into
standing law. Thus, Congress presumably would no longer have to debate and enact
periodic emergency ad hoc assistance.
Specifically, the both versions of the farm bill (H.R. 2646, which next must clear a
House-Senate conference) provide new long-term counter-cyclical support for grains and
cotton, by restoring target prices and deficiency payments, the type of program terminated
by the 1996 Act. In addition, both bills would maintain marketing assistance loans and
loan deficiency payments as they now function, with changes in some loan rates (generally
higher in the Senate version; see Table 1). What are now called fixed annual PFC
payments would be replaced with fixed, decoupled payments to farmers who sign new 10-
year “agreements” (House version), or 5-year “contracts” (Senate version). Rates differ
between the bills.
Both bills would bring soybeans and the minor oilseeds (e.g., sunflowers, etc.) fully
under the support program rules that apply to grains and cotton. In a major departure
from the past, both also would support peanuts like soybeans instead of the traditional
system of peanut marketing quotas and nonrecourse price support loans.
Under the 10-year House bill, fixed payments and target price deficiency payments
would be paid on 85% of each farm's base production (base acres times base yield of each
commodity). A farmer could choose, as base production, either the acreage used for PFC
payments, or average acres planted to eligible crops from 1998 through 2001. Yields
effectively are the 1981-85 averages. Under the 5-year Senate bill, fixed payments and
target price deficiency payments would be paid on 100% of each farm’s base production.
As in the House bill, the farmer could choose either PFC acreage or 1998-2001 average
acres as the base. However, the Senate version permits farmers to update their per-acre
yields to reflect the annual averages for 1998-2001.
The deficiency payment rate would be calculated under both bills as the difference
between the target price and the lower average season market price (but not to exceed the
difference between the target price and the sum of the loan rate and fixed payment).
However, the bills have different target prices (see Table 1).
Milk support would continue under both bills through government purchases of
nonfat dry milk, butter, and cheese. However, the Senate bill has an added feature of
counter-cyclical target price deficiency payments. Under the proposal, dairy farmers in 12
Northeastern states would receive a federal payment whenever the minimum monthly
market price for farm milk used for fluid consumption falls below $16.94 per
hundredweight (cwt.). The payment received by Northeast farmers would be 45% of the
difference between the $16.94 target price and the market price. Milk producers in all
other states also would be entitled to a federal payment whenever the average farm milk
price for a calendar quarter is below the average price for the same quarter during the
previous 5 years. The payment rate would be 40% of the difference between the average
historical price and the lower market price. (See Dairy Farmer Counter-Cyclical
Assistance in the CRS electronic briefing book on Agriculture Policy and the Farm Bill.)

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Table 1. House and Senate Versions of H.R. 2646: Loan Rates,
Direct Payments, and Target Prices
Crop
Loan/Support
Fixed, Decoupled (Direct)
Counter-Cyclical
Rates
Payments
Target Pricesa
Houseb
Senate
House
Senatec
House
Senat
2002/03, 2004/05,
e
2006
Wheat, $/bu
2.58
2.9960
0.53
0.45, 0.225, 0.113
4.04
3.4460
Corn, $/bu
1.89
2.0772
0.30
0.27, 0.135, 0.068
2.78
2.3472
Sorghum, $/bu
1.89
2.0772
0.36
0.31/0.27, 0.135, 0.068
2.64
2.3472
Barley, $/bu
1.65
1.9973
0.25
0.20, 0.10, 0.05
2.39
2.1973
Oats, $/bu
1.21
1.4980
0.025
0.05, 0.025, 0.013
1.47
1.5480
Cotton, $/lb
0.5192
0.5493
0.0667
0.13, 0.065, 0.0325
0.736
0.6739
Rice, $/cwt
6.50
6.4914
2.35
2.45, 2.40, 2.40
10.82
9.2914
Soybeans, $/bu
4.92
5.1931
0.42
0.55, 0.275, 0.138
5.86
5.7431
Minor oilseeds,$/lb
0.087
0.095
0.0070
0.01, 0.005, 0.0025
0.1036
0.1049
Peanuts, $/ton
350d
400
36
all years, 36
480
520
(cts/lb)
(17.5)
(20)
(1.8)
(1.8)
(24)
(26)
a Payment bases differ between the bills.
b Loan rates are maximum allowable levels.
c Reflects payment rates that begin at higher levels in 2002 and decline by 2006.
d This is support level for quota peanuts; the support level for nonquota peanuts is $174/ton ($0.087/lb).
Nearly all of the numerous farm and commodity organizations that testified before
the Agriculture Committees in 2001 requested that additional counter-cyclical support be
developed as a supplement to the current marketing assistance loans and fixed annual
payments, which the House and Senate bills do. Whereas both bills tie the availability of
counter-cyclical assistance to target prices for specified commodities, other designs also
were examined. For example:
•
One plan would trigger payments in a state whenever state (as opposed to national)
gross cash receipts for any of eight program or oilseed crops are forecast for the year
to be less than 94% of that state’s annual average cash receipts for the crop during
1996-1999. Cash receipts would be defined as the national average price times state-
level production. Those who produced the crop during 1998-2000 would be eligible
for a share of total payments (American Farm Bureau Federation).
•
Another would establish a “national target income” for each major crop: that is, the
national average annual market value of the crop during 1996-2000, plus the annual
average of any marketing loan benefits and market loss assistance payments made
during those years. A further adjustment would be made to account for yield
increases since then. Those who produced that crop during 1996-2000 would be
eligible for a share of total payments whenever returns (defined as the crop’s U.S.
production times the average price for the first 3 months of the marketing year) are
below the national target income for the crop (National Corn Growers Association).

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Selected Issues
Cost
The Congressional Budget Office (CBO) estimated the commodity support provisions
of the House version of H.R. 2646 at nearly $119 billion over 10 years (FY2002-2011).
This is approximately $49 billion more than the baseline policy of simply extending current
programs into the future. About $37 billion of the total 10-year cost was attributed to the
new counter-cyclical payments.
CBO estimated the commodity support provisions of the Senate bill at about $110
billion over 10 years. This is approximately $40 billion more than the baseline. About $19
billion of the total 10-year cost is attributed to the new counter-cyclical payments.
(Because the Senate bill would set crop loan rates higher than the House, more of the
potential counter-cyclical aid would be in the form of marketing loan benefits.) However,
the Senate bill is only a 5-year authorization. During that period (FY2002-2006), the
commodity support provisions would cost about $26 billion above baseline, of which over
$5 billion represents the counter-cyclical payments. (CBO assumes that under the Senate
bill, these payments will not result in substantial outlays until FY2005.)
The overall additional estimated cost of both farm bills (commodity plus other
provisions) is apparently still within the $73.5 billion limit permitted under the 10-year
budget resolution (H.Con.Res. 83), approved in spring 2001. Still, annual commodity
program costs would average a projected $12 billion under the House bill and more than
$11 billion under the Senate bill. By comparison, from FY1996 through FY2001, annual
spending on commodity support programs, including emergency assistance, averaged $7.3
billion. (For details, see Agriculture and the Budget in the CRS electronic briefing book
on Agriculture Policy and the Farm Bill.)
International Trade Obligations
The 1994 Uruguay Round Agreement on Agriculture (URAA) obligates countries
to discipline their agricultural subsidy programs and reduce import barriers in order to
promote more open trade. Under the URAA, the United States is committed to subsidies
of no more than $19.1 billion per year under domestic farm policies with the most potential
to distort production and trade.
The URAA contains detailed rules for countries on how to determine which of their
programs must be counted toward their assigned subsidy limits (e.g., $19.1 billion for the
United States). Generally, however, programs that are tied to current prices or current
production must be counted (these are called “amber box” policies). Thus, marketing loan
gains, which rise when crop prices decline and vice versa, are “amber” and must be
counted (but only if their value, along with other subsidies, exceeds 5% of the value of
annual production of that crop). Like marketing loan gains, the proposed target price
deficiency payments in H.R. 2646 would be triggered by current market prices, so they
likely would be considered amber box.
Subsidies that are not linked to prices or production, and/or meet other specified
criteria, might be exempted as “green box” policies. The United States has classified its
PFC payments as “green” because they are made without regard to prices or current

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production. It is anticipated the fixed, decoupled payments in H.R. 2646 would be green
box, although it might be argued that permitting producers to update base acres (and, in
the Senate version, also crop yields) for payment purposes might make them vulnerable
to challenge as amber box. (See CRS Report RS20840, Farm Program Spending: What’s
Permitted Under the Uruguay Round Agreements.)
Some groups have argued that their own counter-cyclical policies could be designed
in a way that they would not have to be counted toward the $19.1 billion limit. For
example, if payments to farmers were triggered by low income (as measured by gross
receipts for one or more commodities) rather than by low prices, they would be exempt,
it has been argued. Others dispute this assertion, noting that it is usually low prices that
cause low income. So, they conclude, if counter-cyclical payments, when added to other
“amber” spending such as marketing loan benefits, caused U.S. spending to exceed $19.1
billion, the United States could be in violation of its world trade commitments.
Differing language in the House and Senate bills is intended to provide a “circuit
breaker” to curtail farm spending in order to stay at or below the $19.1 billion limit. One
issue is whether any such “circuit breaker” would be feasible. U.S. and all other countries’
reports to the WTO on farm subsidies are retrospective. Making benefit calculations far
enough in advance to flag possible “overspending” would be difficult at best, given the
highly speculative (and often incorrect) nature of forecasting future crop production,
prices, and other critical data. Questions also arise about the administrative, economic,
and political implications of changing (i.e., reducing) benefits after they are announced and
farmers make their planting decisions based upon these announcements.
Benefit Distribution
The new counter-cyclical aid in the House and Senate bills focuses on the major crops
– grains, cotton, and oilseeds (and, in the Senate bill, on milk). These generally are the
most widely produced, but that still would leave much of U.S. agriculture ineligible for
such payments, raising questions of equity among commodities, and of the potential for
distorting production toward items that might receive more support. On the other hand,
extending such assistance to more commodities, such as fruits, vegetables, or livestock,
also could increase federal costs, or else mean reduced assistance for grains, cotton, and
oilseeds. Not all commodity groups are seeking such aid, however. For example, the
National Cattlemen’s Beef Association is among those that remain opposed to most forms
of direct assistance, counter-cyclical or otherwise. And, the United Fresh Fruit and
Vegetable Association argued against any subsidies that would insulate fruit or vegetable
producers from market signals or would sustain or encourage production.
Another issue is whether a new counter-cyclical program should perpetuate past
patterns of tying aid to output rather than economic need. Federal farm programs,
including PFC payments, marketing loans and the ad hoc “market loss payments,” have
been based on either past or current production by individual farmers, meaning that larger
payments have trended toward larger operations – which do not or should not need them,
critics argue. They add that if Congress intends to help producers in economic distress,
then such recipients should have to document their need. Others counter that farm
programs are not “welfare” but rather part of a larger policy to ensure that U.S. agriculture
remains competitive in the global economy (an assertion that critics challenge).

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