Order Code RS20848
Updated June 20, 2002
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 by law to subsidize more
than two dozen specified agricultural commodities. Omnibus 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 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. A new farm bill, the Farm Security and
Rural Investment Act of 2002 (P.L.107-171), is intended to avert the need for ad hoc
measures, largely by expanding several existing support programs and adding new ones.
Overview
USDA commodity and price 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 program
financing mechanism, have averaged about $16 billion annually from FY1996 to
FY2002.1
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). Congress frequently alters
provisions of these laws through omnibus, multi-year farm bills, and various budget
measures. The previous farm bill, covering programs through 2002, was the 1996 Federal
Agriculture Improvement and Reform Act (P.L. 104-127). “Emergency” farm laws
1 USDA’s Farm Service Agency (FSA) delivers CCC-funded 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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enacted in 1998, 1999, 2000, and 2001 (P.L. 105-277, P.L. 106-78, P.L. 106-224, P.L.
107-25) provided temporary supplemental aid for major commodities.2
The newest omnibus farm law, the Farm Security and Rural Investment Act of 2002
(P.L.107-171), is intended to avert the need for such supplemental aid. It expands several
existing support programs and adds new ones, notably new “counter-cyclical” support
available when farm prices for major crops and for milk decline beneath statutorily
prescribed levels. This law is effective from 2002 through 2007.
Current law requires USDA to offer support for wheat, feed grains (corn, sorghum,
barley, oats), cotton (upland and extra-long staple–ELS), rice, soybeans, other oilseeds
(sunflower seed, canola, rapeseed, safflower, flaxseed, mustard seed), milk, peanuts, beet
and cane sugar, wool, mohair, honey, dry peas, lentils, small chickpeas, and tobacco.
These commodities accounted for approximately $75 billion, or 37%, of all farm
cash receipts in 2001. Other commodities that normally receive no direct support include
meats, hay, poultry, fruits, nuts, vegetables, and nursery/greenhouse products. 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.3
Statutorily Required Support
Policymakers have devised a variety of program methods for the CCC to assist
producers, each generally designed to achieve these broad objectives:
! To supplement farmer incomes. Tools include annual fixed decoupled
payments and counter-cyclical deficiency payments for grains, cotton,
oilseeds, and peanuts; counter-cyclical deficiency payments for milk; and
nonrecourse marketing loans and loan deficiency payments for grains,
cotton, peanuts, oilseeds, wool, mohair, honey, dry peas, lentils and small
chickpeas;
! To manage supplies and support commodity market prices. Marketing
quotas/acreage allotments for tobacco, and marketing allotments, for
sugar, are available to restrict output. Surplus purchases help support
farm prices for milk and various specialty crops.
The types and levels of support employed vary by commodity. Some are supported
by only one method; others receive their support through a combination of program tools.
2 Most of these acts also provided separate funds for disaster losses. See CRS Report RL31905,
Emergency Spending for Agriculture: A Brief History of Congressional Action, FY1989-2001.
3 Although such commodities generally do not receive mandatory support under CCC price and
income support programs, Congress or the Administration often provide periodic assistance to
them. For example, the 2002 farm law requires USDA to pay apple growers $94 million to cover
2000 market year losses, and to spend $200 million annually to purchase fruits, vegetables, and
specialty crops under the Section 32 program. See also “USDA Discretionary Support,” page 5.

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Wheat, Feed Grains, Upland Cotton, Rice, Peanuts, Soybeans, and
Other Oilseeds. Eligible producers (those with past production histories for these
crops) can receive fixed, decoupled payments each year (see rates in table); along with
counter-cyclical deficiency payments, which make up the difference between the crop’s
average market price plus the fixed payment and its “target price” (see table), which is
pegged to past production. Both payments to a producer are based on 85% of the farm’s
past production history, i.e., past acreage planted times per-acre yield, calculated under
formulas in the 2002 farm law. Payment recipients can plant almost any combination of
crops on their land; they are not bound by the annual, USDA-imposed supply
management rules for each crop in effect prior to 1996. Some restrictions do exist: for
example, land generally cannot be replanted to fruits and vegetables, and conservation
rules must be followed, on subsidized farms.
Fixed Decoupled
Counter-Cyclical
Loan Rates
Payment Rates
Target Prices
Crop
2002/03,
2002/03,
2004/07 *
2002-2007
2004/07 *
Wheat, $/bu
2.80, 2.75
0.52
3.86, 3.92
Corn, $/bu
1.98, 1.95
0.28
2.60, 2.63
Sorghum, $/bu
1.98, 1.95
0.35
2.54, 2.57
Barley, $/bu
1.88, 1.85
0.24
2.21, 2.24
Oats, $/bu
1.35, 1.33
0.024
1.40, 1.44
Cotton, $/lb
0.52, 0.52
0.0667
0.724, 0.724
Rice, $/cwt
6.50, 6.50
2.35
10.50, 10.50
Soybeans, $/bu
5.00, 5.00
0.44
5.80, 5.80
Other oilseeds, $/lb
0.096, 0.093
0.008
0.098, 0.101
Peanuts, $/ton**
355
36
495
* Reflects rates that change in some years.**Peanut quotas were ended by 2002 law; quota
holders also are receiving $220/ton/year for 5 years as compensation.
Producers, regardless of whether they receive the above payments, also are eligible
for nonrecourse marketing assistance loans and loan deficiency payments. (See table for
rates.) To qualify, a farmer pledges the stored crop as collateral. Nonrecourse loans
generally must be repaid with interest within 9 months 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 features are intended to help avert forfeitures, and
subsequent buildup of CCC-owned surpluses. First, the “marketing loan” feature enables
the farmer to repay the loan at a USDA-calculated rate approximating 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 available to eligible producers who choose not to take out

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a crop loan. (See Grains, Cotton, and Oilseeds: Farm Bill Policy in the CRS Electronic
Briefing Book on Agriculture Policy and Farm Bill.)
ELS Cotton, Wool, Mohair, Honey, Dry Peas, Lentils, and Chickpeas.
Producers of these commodities are not eligible for fixed decoupled or for counter-
cyclical payments, but can receive nonrecourse marketing assistance loans and (except
for ELS cotton) loan deficiency payments. Loan rates are specified in the 2002 farm law.
Tobacco. The tobacco program, intended to be operated at no net government cost,
operates through a combination of mandatory marketing quotas and nonrecourse loans.
Marketing quotas limit the amount of tobacco each farmer can sell, which indirectly raises
market prices. The loan program establishes guaranteed minimum prices. (See CRS
Report 95-129, Tobacco Price Support: An Overview of the Program.)
Sugar. A combination of import quotas and nonrecourse loans is intended to
support prices at 18¢/lb.(raw cane) and 22.9¢/lb. (refined beet), at no net cost to the
government. Marketing allotments limit production to avoid loan forfeitures and CCC
costs; also authorized are payments (in the form of CCC-owned sugar) to farmers who
agree to acreage reduction. (See CRS Issue Brief IB95117, Sugar Policy Issues.)
Milk. Price support is provided through surplus commodity purchases. The CCC
buys bulk cheese, butter, and nonfat dry milk from dairy processors unable to sell them
on the private market for at least the prices offered by the CCC. These prices are set so
that processors will, in turn, pay farmers a milk price that reflects at least the federally
mandated support, currently $9.90 per cwt. A new “National Dairy Program” offers
counter-cyclical payments equal to 45% of the difference between $16.94 and the Boston
Class I (fluid use) price, whenever that price is lower than $16.94; each farmer’s payments
are limited to 2.4 million lbs. of annual production (approximately a 120-140-cow herd).
(See CRS Issue Brief IB97011, Dairy Policy Issues.)
USDA Discretionary Support
In addition to the explicitly-required subsidies described above, federal law has long
given USDA the discretion to offer support for virtually any farm commodity. Recent
examples have included 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).
Authority and funding for these various activities can come from a number of sources,
including CCC (e.g. under the CCC charter act) and Section 32.
Section 32 (of P.L. 320, a 1935 law) permanently appropriates the equivalent of 30%
of annual customs receipts to support the farm sector through a variety of activities. Most
of this appropriation (now about $6 billion per year) is 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 which up to $500 million
annually can be carried over each year), which it uses for "emergency removals" of
surplus agricultural commodities, disaster relief, or other unanticipated needs. USDA
annually purchases hundreds of millions of dollars in meats, poultry, fruits, and vegetables
under Section 32 each year. (See CRS Report RS20235, Farm and Food Support Under
USDA’s Section 32 Program).

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Payment and Loan Limitations
Most commodity subsidies are tied to units produced; therefore, higher output
(sometimes past, sometimes current, depending upon the subsidy) means higher benefits,
with some limits. For grains, cotton, and oilseeds, the law sets an annual ceiling for fixed
decoupled payments at $40,000 per person, plus a separate annual ceiling for counter-
cyclical payments at $65,000 per person. A separate payment limit of $75,000 per person
applies to marketing loans gains for these crops and for dry peas, lentils and chickpeas.
Because an individual can receive half-payments on two additional farms, the
effective annual cap on total combined payments actually has been $360,000 per person.
Limits apply to individuals rather than farm units; thus, a single farm with multiple
owners/operators might receive much more than the above amounts. Also, there is no
per-person monetary limit on the volume of crops that can be put under CCC loan, or on
how much can be forfeited in lieu of loan repayment. Finally, marketing loan gains in the
form of USDA-issued commodity certificates (which farmers immediately redeem to
satisfy loan repayments) are not counted toward the $75,000 loan cap. Peanuts have
separate payment caps, as do wool, mohair, and honey. (See Commodity Program
Payment Limits Under the 2002 Farm Bill in the CRS Electronic Briefing Book on
Agriculture Policy and Farm Bill.)
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 – would
help to ensure an abundant supply of food and fiber at reasonable prices in the future.
Since then, farming has changed significantly. Most commercial agriculture is now
confined to fewer, larger, and more specialized operations. In 1997 (the last farm census
year) 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 mainly part-time, where operators rely on off-farm sources for most of
their income. Farm residents now account for less than 2% of the total U.S. population.
Also, the economic health of farmers has become increasingly tied to the needs of
processors and marketers, and to global markets. Critics have long argued that U.S.
commodity-based policies are outdated and may even be detrimental to modern
agriculture, and to society in general. Although the programs have retained many features
dating to the 1930s, they also have evolved – in response both to the changes occurring
in agriculture and the economy, and to budgetary and trade pressures. At issue is whether
they have evolved quickly enough, or in the most appropriate ways.
Congress and the Administration 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

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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. Analysts anticipated that CCC net outlays
under the 1996 law would average less than $6 billion yearly, compared with $15 billion
yearly during the 1980s and $10 billion in the early 1990s.

However, unanticipated declines in export markets and in farm prices both drove up
the cost of programs already authorized by the 1996 farm law (primarily marketing loans
and loan deficiency payments), and also led Congress to enact, between 1998 and 2001,
more aid. About $30 billion in emergency farm and related assistance was approved, of
which some $22 billion was in response to falling commodity prices (the rest was natural
disaster aid). For calendar 2000 and 2001, direct farm payments reached a total of $22.9
billion and $21.1 billion, respectively – representing 49% and 43% of net farm income
for each year. CCC net outlays for all farm-related programs and activities reached a
record $32.3 billion in fiscal year 2000. They declined to $22.1 billion in FY2001.
Record-high subsidies helped the farm economy as a whole remain in relatively
strong financial condition in recent years. However, most policymakers and farm groups
sought a new farm law that would preclude the need for future ad hoc assistance bills.
This led to adoption, in the 2002 law, of new counter-cyclical assistance whereby
subsidies (for grains, cotton, oilseeds, and milk) automatically increase when farm prices
decline, and decrease when they rise.
This and other commodity provisions in the law have attracted widespread criticism
from those here and abroad who view them as reversing the market-oriented course
Congress had charted for long-term farm policy in 1996. These critics argue that the bill
perpetuates outmoded, commodity-oriented policies that tie support to the prices of a few
major row crops; with legislated target prices and loan rates set well above market prices,
U.S. producers will continue to over-produce supported commodities, distorting market
prices and global trade. CCC outlays are now projected to average $17-20 billion
annually – and perhaps more – through FY2007, at a time of a deepening federal deficit
and more pressing national priorities, they argue. Furthermore, the adoption of expanded
farm subsidy programs has undermined U.S. credibility in world trade negotiations, where
the United States has called on other countries to reduce their own trade distorting
agricultural subsidies, they contend.
Supporters counter that the bill’s commodity title provides needed support to farmers
who otherwise would see plunging incomes and asset (e.g., land) values due to continuing
poor price and market conditions worldwide. The bill maintains market orientation by
continuing to give farmers the flexibility to plant crops based on market signals unbound
by government supply management rules. The measure fully complies with congressional
spending limits, and will provide no more in subsidies than farmers received under the
last omnibus farm law as supplemented by the emergency farm measures, they note. The
new law contains a new “circuit breaker” that requires USDA to cut trade-distorting
subsidies in order to remain within the $19.1 billion limit on such spending under the
Uruguay Round Agreement on Agriculture. And, the United States will be in a stronger
position to negotiate new agricultural trade reforms: the United States should not
unilaterally cut its own subsidies until foreign competitors reduce their own often higher
subsidies, as well as their barriers to U.S. farm exports, supporters contend.

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