Wheat, Feed Grains, Cotton, Rice, and Oilseeds Provisions of the Enacted 1996 Farm Bill

Wheat, Feed Grains, Cotton, Rice, and Oilseeds Provisions of the Enacted 1996 Farm Bill

96-351 ENR
Updated May 20, 1996
Received through the CRS Web
Wheat, Feed Grains, Cotton, Rice, and Oilseeds Provisions of the
Enacted 1996 Farm Bill1
Geoffrey S. Becker
Specialist in Agricultural Policy
Environment and Natural Resources Policy Division
SUMMARY
The "Agricultural Market Transition Act" (Title I of the 1996 farm law) ushers in a new
system of price and income supports for producers of wheat, feed grains, cotton, rice, and
oilseeds. The new system offers a 7-year "production flexibility contract" to producers with
cropland enrolled in the old grains or cotton programs in one of the past 5 years. Each
contract will provide fixed, but declining, annual payments that no longer are tied to market
prices, to the planting of a specific crop, or to annual land set-aside requirements. The new
law earmarks about $37 billion through 2002, effectively creating, for the first time, an annual
limitation on such direct payments. In addition, marketing assistance loans are offered for
most producers of wheat, feed grains, rice, cotton, and oilseeds.
DESCRIPTION OF THE NEW PROGRAM
For decades, federal law has required the U.S. Department of Agriculture (USDA) to offer
price and related support to producers of nearly two dozen specified farm commodities.
Through 1995, the primary price support tools for the crops covered in this report--specifically
wheat, feed grains (corn, sorghum, barley, oats), rice, and cotton--were: (1) target price
deficiency payments, which increased when market prices were low, and decreased when
market prices were high; (2) crop loans offered at harvest time; and (3) acreage reduction
programs, usually imposed as a condition of receiving support payments and loans. Support
for oilseeds was limited to loans. The Department’s Farm Service Agency, or FSA (formerly
the Agricultural Stabilization and Conservation Service) each year announced a "program"
stipulating what and how much a participating farmer could plant, and what his or her crop
benefits would be, based on statutory formulas.
These programs generally derived their authority from three permanent laws which are
still on the books: the Agricultural Adjustment Act of 1938 (P.L. 75-430); the Agricultural Act
of 1949 (P.L. 81-439); and the Commodity Credit Corporation (CCC) Charter Act of 1948
(P.L. 80-806). However, Congress has frequently altered key provisions of these original laws-
1Sources include: the conference report accompanying the 1996 farm bill (H.R. 2854; H.
Rept. 104-494); fact sheets issued by the U.S. Department of Agriculture; various reports by the
Agriculture and Food Policy Center of Texas A&M University; and recent CRS reports.
Congressional Research Service · The Library of Congress

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-usually through omnibus multi-year farm or budget bills--to adjust to contemporary market
conditions, control spending, or address other policy concerns.
The most recent legislation, the Federal Agricultural Improvement and Reform (FAIR)
Act of 1996 (P.L. 104-127), again suspends most of the provisions of permanent law for grains
and cotton (section 171). In their place, this new farm law establishes, for the next 7 years,
a new support program under Title I, the "Agricultural Market Transition Act," also known
widely as "Freedom to Farm." Following are selected key provisions.
Production Flexibility Contracts
Under subtitle I-B, 7-year "production flexibility contracts" are offered for fixed (but
generally declining) annual payments to producers with acreage that had been enrolled in the
old wheat, feed grains, upland cotton, and/or rice programs in at least 1 of the past 5 crop
years. These contracts replace target price payments.
USDA has announced a one-time signup period for the contracts, from May 20 through
July 12, 1996; after that, only producers with crop bases exiting the conservation reserve
program (CRP) can enroll. Payments will be made in two installments each year.
Available funding. Annual spending for the 7-year production flexibility contracts is
specified by section 113 of the law. The annual totals are allocated among crops based on the
following percentages, intended to reflect their previous share of recent CCC outlays: wheat,
26.26%; corn, 46.22%; sorghum, 5.11%; barley, 2.16%; oats, 0.15%; upland cotton, 11.63%;
rice, 8.47%. The law also requires that the rice allocation be supplemented by an additional
$8.5 million annually, beginning in FY1997. This spending, which will continue to be funded
through the CCC, USDA’s commodity financing arm, is viewed as both a guarantee and a
ceiling on outlays (see table 1 for annual funding, by crop).
Seven-year cumulative spending for commodity contracts is locked in at $35.7 billion.
Provisions in the law require that additional funding adjustments be made within the individual
crop allocations to compensate for past deficiency payments made to, or repaid by, farmers.
The net result of these adjustments is expected to add another approximately $1.5 billion (over
and above the $35.7 billion) to contract funding.
This upward adjustment in total available funding translates into higher per-unit payment
rates. That effectively benefits wheat, feed grain, and cotton farmers who, because crop prices
are now higher than anticipated a year ago, must repay the advances they received on their
projected 1995 deficiency payments. (Unreturned advances will be deducted from individuals’
1996 or 1997 contract payments).
Previously, annual CCC outlays for income supports increased or decreased depending
upon market prices for supported crops. The new, fixed spending levels apply to contract
payments only; CCC annual outlays for crop loans, and for other commodity programs and
related activities, can continue to rise and fall depending upon market and other conditions not
directly influenced by statute.

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Table 1. Funding for Transition Payments by Crop and Fiscal Year
(millions of dollars)
1996
1997
1998
1999
2000
2001
2002
Total
Corn
2,574
2,489
2,681
2,590
2,371
1,909
1,852
16,466
Sorghum
285
275
296
286
262
211
205
1,820
Barley
120
116
125
121
111
89
87
769
Oats
8
8
9
8
8
6
6
53
Wheat
1,463
1,414
1,523
1,471
1,347
1,085
1,053
9,356
Cotton
648
626
675
652
597
480
466
4,144
Rice
472
465
500
483
443
358
348
3,069
Total
5,570
5,394
5,809
5,612
5,139
4,139
4,017
35,680
Payments. Section 114 specifies how payments will be calculated, as follows:
•
USDA first will determine per-unit (per-bushel or per-pound) rates for each crop by (1)
calculating, for each contract crop, total national production--set at 85% of total national
contract acreage times farm program yield--and then (2) dividing that amount into the
total pot of money allotted annually for each of these crops.
Various estimates of
average payment rates over the 7-year period have ranged as follows: 32 to 38 cents per
bushel for corn; 37 to 45 cents per bushel for sorghum; 24 to 30 cents per bushel for
barley; 2.7 to 6 cents per bushel for oats; 61 to 67 cents per bushel for wheat; 7.1 to 8.1
cents per pound for upland cotton; and $2.57 to $2.59 per 100 pounds (cwt.) for rice.
These estimates are averages; payment rates generally decline each year over the life of
the contract. Final rates will be announced by USDA once officials determine the actual
number of acres (national contract acreage) enrolled by U.S. farmers: fewer enrolled acres
will mean higher rates, and vice versa.
•
Each farm’s total annual payment for each contract commodity can then be calculated
by multiplying the above payment rate times 85% of the "acreage base" times the
"program yield." A farm’s "acreage base" is the average acres planted or considered
planted under the old program for the prior 5 years for wheat and feed grains, and the
prior 3 years for upland cotton and rice. "Program yields" (i.e., theoretical per-acre
production under the old program) remain frozen at 1986 levels.
The total annual
payment for those with multiple contract crop bases will be the sum of the calculations
for each of the individual contract commodities. An example of a contract calculation
appears on page 6.
Contract payments are tied to land, not individuals. Generally, section 111 stipulates that
an individual must: (1) own eligible farmland and assume all or part of the production risk;
(2) operate eligible farmland with a share-rent lease with a landowner, who must sign the same
contract; (3) operate eligible farmland that is cash-rented (rules here vary depending upon lease
duration).
USDA must continue a policy of protecting the interests of tenants and
sharecroppers. Precisely how this will be accomplished--and whether, as some critics predict,
landowners will have a greater advantage over tenants than in the past--remains to be seen.

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Planting flexibility.
Previously, each commodity program participant’s farm had a
separate acreage base for each program crop, and with some exceptions had to be planted to
the specified crop, but not in excess of the acreage base. The new law combines crop-specific
bases into a single contract acreage base for each farm.
Section 118 effectively permits
participating farmers to plant any combination of wheat, feed grains, cotton, rice, oilseeds, or
other crops on the entire contract acreage (or put the land into a conserving use). Generally,
fruits and vegetables cannot be planted on contract acres; however, exceptions apply for
USDA-specified regions with a history of double-cropping contract commodities with fruits
or vegetables, and for individuals with a fruit and vegetable planting history. Unlimited haying
and grazing is permitted on all acreage, including contract acreage. On land outside of the
contract acreage, there are no constraints on the choice of crops.
Section 111 explicitly requires that contract land be used for agriculture-related activities,
which would include conservation uses, and that contract holders satisfy conservation
compliance and wetlands protection regulations.
Farmers no longer are required to buy
catastrophic crop insurance to receive contract benefits, as long as they waive eligibility for
any disaster assistance (section 193).
No annual acreage reduction. Section 171 repeals USDA’s authority to impose annual
cropland diversion requirements (notably, an Acreage Reduction Program, or ARP) that shift
acreage out of crop production and into conserving uses. ARPs were imposed in the past to
reduce acres eligible for payments and thereby cut federal expenditures, and also to raise
market prices by reducing supplies.
Crop Loans
Under subtitle I-C, nonrecourse marketing assistance loans, and loan deficiency payments,
continue to be available upon harvest. Section 132 generally requires that the rates per bushel
(or per pound) be set at 85% of average market prices for the preceding 5 years, excluding the
high and low years (the upland cotton formula differs somewhat).
As table 2 indicates,
maximum rates are specified for all crops. Some have minimums, and USDA has authority
to lower wheat and feed grain rates by as much as 10% to minimize surpluses.
Eligibility for wheat, feed grains, upland cotton, and rice loans is limited to those with
production flexibility contracts, although the entire farm’s production (not just contract acres)
can qualify. However, all oilseed and extra-long staple (ELS) cotton is eligible at harvest,
whether or not it is grown on a contract farm (oilseeds and ELS cotton are not considered
"contract" crops eligible for payments).
Loan repayment provisions. Technically crop loans must be repaid with interest within
9 months (10 months for cotton) of borrowing or else the producer forfeits the collateral crop
to the government, which has "no recourse" other than to accept it in lieu of repayment.
However, section 134 continues the concept of "marketing loans," which enable 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 an
inherent subsidy. Moreover, loan deficiency payments (equal to marketing loan gains) also are
made to eligible producers who choose not to take out loans (section 135).

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Table 2. Crop Loan Rates
Commodity
Maximum Rate
Minimum Rate
Corn (bushel)
$1.89
No minimum; up to 10% reduction (below formula-
set rate) permitted to minimize surpluses
Sorghum, Barley, Oats
Other feed grain rates must be set at levels "fair and equitable" relative to corn
(bushel)
feed value
Wheat (bushel)
$2.58
No minimum; up to 10% reduction permitted
Upland Cotton (pound)
51.92 cents
50 cents
ELS Cotton (pound)
79.65 cents
No minimum
Rice (100 pounds)
$6.50
$6.50
Soybeans (bushel)
$5.26
$4.92
Other Oilseeds (pound)
93 cents
87 cents
Under section 135, USDA will continue to calculate cotton and rice loan repayment rates
based on world market prices.
Wheat, feed grains, and oilseeds repayment rates will be
calculated so as to minimize loan forfeitures and government surplus acquisitions, and to
encourage the movement of commodities into private markets (likely to be the local elevator
or "posted county" price).
Under section 163, interest rates that producers pay on new
commodity loans are increased by 1%.
Section 171 suspends the farmer-owned reserve, which permitted wheat and feed grain
producers (under specified surplus conditions) to extend their loans for up to an additional 27
months or more. Cotton loans no longer can be extended for an extra 8 months; however, so-
called cotton "Step 2" payments, made whenever U.S. cotton prices are more than 1.25 cents
per pound above world prices, are continued, subject to a 7-year spending limitation of $701
million (section 136).
Annual Payment Limits
Annual contract payments are limited by section 115 to no more than $40,000 per
"person" actively engaged in farming (compared with $50,000 previously for target price
deficiency payments). Marketing loan gains or loan deficiency payments remain limited to a
separate $75,000 per person. There is no change in the so-called "three entity rule" which
permits a person to receive up to half of the above annual limitations on each of two more
farms, effectively enabling total benefits to reach $230,000 annually (a total of $80,000 in
contract payments and another $150,000 in marketing loan gains). Annual payment limitations
apply to the sum of benefits for all crops; there is not a separate cap for each crop.
Commission on 21st Century Production Agriculture
Subtitle I-G establishes a Commission on 21st Century Production Agriculture to conduct
a comprehensive review of U.S. agricultural conditions, the effects of the new market transition
contracts, and related issues, and to make recommendations for future farm policy. Initial and
final reports are due by June 1, 1998, and January 1, 2001, respectively.

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Determining a Producer’s Annual Contract Payment: Example
(Theoretical example is a farmer with 300 acres of corn base and 450 acres of upland
cotton base.)
CORN CONTRACT ACRES:
300 acres
(1996 "acreage base"--average acres planted
or considered planted for the prior 5 years)
TIMES 85%:
255 acres
TIMES PROGRAM YIELD:
120 bushels/acre
(frozen at 1986 level)
EQUALS PAYMENT QUANTITY:
30,600 bushels
TIMES PAYMENT RATE:
38 cents
(example; actual rate to be determined
by USDA)
EQUALS TOTAL PAYMENT FOR CORN:
$11,628
COTTON CONTRACT ACRES:
450 acres
(1996 "acreage base"--average acres planted
or considered planted for the prior 3 years)
TIMES 85%:
382.5 acres
TIMES PROGRAM YIELD:
600 pounds/acre
(frozen at 1986 level)
EQUALS PAYMENT QUANTITY:
229,500 pounds
TIMES PAYMENT RATE:
8 cents
(example; actual rate to be determined
by USDA)
EQUALS TOTAL PAYMENT FOR COTTON:
$18,360
TOTAL ANNUAL CONTRACT PAYMENT:
$29,988
(Producer can plant any crop or combination of crops, except for restrictions on fruits and
vegetables, on the entire 750 acres.
On any additional acres on the farm, there are no
restrictions.)