Farm and Food Support Under USDA’s Section 32 Program

Order Code RS20235 Updated February 23, 2007 Farm and Food Support Under USDA’s Section 32 Program Geoffrey S. Becker Specialist in Agricultural Policy Resources, Science, and Industry Division Summary “Section 32” is a permanent appropriation that since 1935 has earmarked the equivalent of 30% of annual customs receipts to support the farm sector through a variety of activities. Today, most of this annual appropriation (now approximately $7 billion) is transferred to the U.S. Department of Agriculture (USDA) account that funds child nutrition programs. The Secretary of Agriculture also uses Section 32 funds to purchase non-price-supported commodities like meats, poultry, fruits, vegetables, and fish, which are diverted to school lunch and other domestic food programs; to pay for special farm disaster relief; and for other purposes. Among other issues is how much flexibility the Secretary should have in deciding Section 32 spending priorities. This report will be updated. What Is Section 32? Section 32 of the act of August 24, 1935 (P.L. 74-320 as amended; 7 U.S.C. 612c) authorizes a permanent appropriation equal to 30% of annual U.S. customs receipts. The money was first available to assist Depression-era producers of non-price-supported commodities. Section 32 funds are to be used for (1) encouraging the export of farm products through producer payments or other means; (2) encouraging the domestic consumption of farm products by diverting surpluses from normal channels or increasing their use by low-income groups; and (3) reestablishing farmers’ purchasing power. The Secretary of Agriculture has considerable discretion in deciding how to achieve these broad objectives. Unused amounts of up to $500 million a year may be carried into the next fiscal year. Uses of Section 32 Funds USDA’s best-known use of Section 32 funds has been direct purchases of non-pricesupported commodities, such as meat, poultry, fruits, vegetables, and fish. This activity began shortly after passage of the 1935 law and continues today. The department seeks outlets for these purchases that do not disrupt private markets. Early in the program, CRS-2 USDA began donating its purchases to low-income families and schools, on the premise that the donations would supplement, not displace, normal food purchases by these recipients. Distribution of Section 32 commodities is credited with stimulating growth of the national school lunch program. Today, school lunch and other domestic nutrition programs benefit in two ways from Section 32 funds. First, much of the Section 32 permanent appropriation now simply is transferred into USDA’s Food and Nutrition Service (FNS) child nutrition account, where it is supplemented by a separate direct appropriation provided through the annual USDA appropriation law. The commingled funds are then used to provide cash and commodity subsidies to schools and other eligible program sponsors for meals served to children. Second, a smaller — but still significant — amount of Section 32 money is used to purchase non-price-supported commodities directly and provide them to schools and other feeding sites. These purchases are made by USDA’s Agricultural Marketing Service (AMS). Some of these commodities ($550 million worth in FY2006) are mandated; Sections 6, 13, and 14 of the Richard B. Russell National School Lunch Act (P.L. 79-396) “entitle” schools and other child nutrition program sponsors to commodities worth specific dollar amounts. Others are “bonus” commodities, which schools and other domestic food programs receive after AMS makes emergency commodity purchases to relieve farm surpluses that occur throughout the year (bonus purchases were valued at $81 million in FY2006). Section 32 is also used to fund other programs (see the next section). Fiscal Year 2006 Spending An accounting of a recently completed fiscal year (FY2006) illustrates how money is collected and spent.1 The program’s permanent appropriation was $6.482 billion, representing 30% of prior calendar-year customs receipts. This figure was reduced by: — $38 million, a rescission mandated by Congress for budgetary savings. — $5.188 billion, transferred to the child nutrition program cash account, to help pay for federal child nutrition programs budgeted at about $12.66 billion in FY2006. (The difference, $7.47 billion, is provided directly through the annual, i.e., FY2006, USDA appropriation.) — $79 million (30% of customs revenue from fish product imports), transferred to the Commerce Department for fisheries activities. This left $1.177 billion, to which was added $286 million in unobligated FY2005 money that was carried into FY2006, for a total of $1.463 billion. From this: ! 1 $465 million was designated for planned AMS commodity purchases to partially fill the commodity assistance entitlement set by the school lunch act. (This law mandates USDA commodity support for each meal served — in FY2006, 17.5 cents for a total of $946 million in child nutrition commodity entitlements. To buy these commodities, $486 million Primary sources: USDA Budget Explanatory Notes for Committee on Appropriations, FY2007 and FY2008; and unpublished November 2006 data from the AMS budget office. CRS-3 ! ! ! ! ! provided from USDA’s FY2006 child nutrition appropriation was added to the $465 million set aside from Section 32 funds.) $85 million in additional commodities were purchased to fulfill another school lunch act requirement that at least 12% of assistance be provided to schools in the form of commodities. $700 million was made available by USDA in direct payments mainly to compensate Florida crop producers for hurricane and disease losses, and some for livestock drought relief. $2 million went for disaster relief foods (e.g., for Hurricane Katrina). $44 million was used for AMS administrative expenses for direct food purchasing (including the cost of setting up a new Web-based supply management system), and for oversight of federal marketing orders. $81 million was used for “emergency removals” of surplus commodities during the course of the fiscal year ($62 million for fruits and vegetables; $2 million for meats and $16 million for poultry).2 Subtracting the above spending, and making an upward bookkeeping adjustment to account for “deobligations” of prior year obligations, AMS estimated that it had a “carryout” of $147 million at the end of the year, which was added to available funding for the following fiscal year (FY2007). Commodity Purchases Overview. Section 32 pays for direct purchases of commodities that are not covered by agricultural price support through USDA’s Commodity Credit Corporation (CCC). A portion of these are planned (e.g., in FY2006, the $465 million in purchases to help satisfy Section 6(e) mandated assistance under the school lunch act). Others are unplanned purchases are of “surplus” commodities, using the contingency fund ($81 million in FY2006). All Section 32 purchases differ from CCC price support in that Section 32 does not specify which commodities must be assisted, at what levels, or how, leaving such decisions to the Secretary of Agriculture. In planning the required commodity purchases, USDA agencies consult with major commodity organizations and devise, by early spring, a tentative purchase plan for the next school year (purchases may begin in May). The plan is based on prior year purchases, likely school needs, expectations of available funds, and any anticipated surplus or other market conditions in the coming year, among other things. AMS issues the bid specifications for purchasing the products, generally in processed form, for delivery to state drop-off points. The Kansas City office of USDA’s Farm Service Agency administers the purchase contracts and pays the vendors. Contingency Fund Purchases. Over the course of the year, USDA taps the contingency reserve for so-called emergency surplus removals, which are then distributed as “bonuses” to domestic food assistance programs. The department may learn about these needs through its own commodity experts or be informed of surplus or other problems by outside farm and industry organizations. 2 As noted earlier, such emergency purchases are provided as a “bonus” to schools (over and above their “entitled” amounts) and to other designated domestic food assistance programs. CRS-4 Table 1. Section 32 Contingency Fund (Bonus) Purchases, by Commodity, FY1995-FY2006 Commodity Total Purchased (million $) Number of Years Purchased Commodity Total Purchased (million $) Number of Years Purchased almonds 29.6 3 grapefruit 10.9 4 apples 79.1 6 lamb 27.1 5 apricots 65.9 9 mixed fruit 17.5 2 asparagus 26.3 6 oranges 69.5 4 beans 16.7 3 peaches 164.4 10 beef 125.8 7 pears 46.7 6 bison 18.5 3 pineapple 21.3 5 black-eyed peas 4.0 2 plums 8.2 3 blackberries 0.9 2 prunes 20.3 3 blueberries 40.6 5 pork 163.3 5 catfish 6.0 2 potatoes 102.8 7 cheese 5.0 1 raisins 88.7 5 cherries 93.8 8 raspberries 4.9 5 5.1 1 salmon 111.7 11 73.8 5 strawberries 14.6 4 0.2 1 sweet potatoes 38.2 5 dates 10.8 5 tomatoes 20.7 3 egg products 10.0 1 trail mix 97.1 4 figs 23.5 6 tuna 14.0 2 fowl (spent) 25.8 3 turkey 66.4 4 1.0 1 walnuts 65.9 8 corn cranberries currants goose grape juice 18.1 3 TOTAL 1,854.7 Source: USDA and House Appropriations Committee, various hearing reports. Each category represents commodities and/or any foods processed from them purchased by AMS. Purchases for each category are cumulative for the 12-year period covered; part-year (not total) FY2006 data was incorporated into total. As Table 1 indicates, some commodities are bought more frequently than others. AMS made contingency purchases of salmon in 11 out of the 12 years examined, at a total cost of nearly $112 million. Other relatively frequent purchases were of peaches, apricots, cherries, walnuts, beef, potatoes, apples, asparagus, figs, pears, and pork. Were these contingency purchases, particularly of commodities bought in multiple years, justified? AMS maintains that each of its purchase decisions is based upon an analysis of market conditions at the time, and that industry requests to buy products are rejected if conditions do not justify them. Some have questioned the decision-making process. In a 2005 assessment, the Office of Management and Budget (OMB) concluded that Section 32 had not adequately demonstrated results due to, among other things, CRS-5 unclear purposes, no basic criteria for surplus commodity purchases, and lack of performance measures.3 What OMB and other critics view as flaws, program supporters view as flexibility to quickly and efficiently address agricultural problems. Table 2. Total Annual Contingency Purchases (FY1995-FY2006, in millions) 1999 $144.5 2003 2000 $191.95 2004 1995 1996 $96.7 $55.8 1997 1998 $100.9 $194.8 2001 2002 $200.2 $206.9 2005 2006 $222.1 $226.5 $149.5 $81 Donations of Contingency Purchases. Besides schools and child care centers, recipients include soup kitchens, food banks, and others serving the needy. The annual total of contingency purchases — and thus the foods provided to these outlets — has varied. Recent annual totals have varied from $56 million in FY1996 to more than $226 million in FY2004; the total declined steeply from FY2004 to FY2006 (Table 2). The drop raises concern among many domestic food providers. They concede that the food they have received through this Section 32 activity is a “bonus” and not an “entitlement,” but say they had come to rely on the higher levels to help meet client demand. Section 32 and Specialty Crops The 2002 farm bill (P.L. 107-171, §10603) requires that not less than $200 million annually in Section 32 funds be used to buy fruits, vegetables, and other specialty crops, $50 million of it for fruits and vegetables for schools through the Defense Department Fresh Program. There has been debate over whether the $200 million is “new” money. USDA has maintained that it already spends more than this level each year, when both mandatory and contingency (bonus) purchases are counted. In fact, Section 32 specialty crop purchases have averaged $308 million over the last seven fiscal years (FY2000FY2006), according to USDA purchase data examined by CRS. Some lawmakers and lobbyists for the fruit and vegetable industry contend that the 2002 farm bill conference report directs that the $200 million should be in additional purchases. Senate reports accompanying annual USDA appropriations have reminded USDA of these farm bill instructions, but USDA officials argue that these instructions are not binding because they are in report language and not in the law itself. In early 2007, the Administration announced its recommendations for a 2007 farm bill. One of these recommendations is to spend an additional $2.75 billion of Section 32 funds, spread over 10 years, to purchase more fruits and vegetables for the domestic nutrition programs, with the aim of increasing recipients’ consumption of these products. This would bring total fruit and vegetable purchases (mandated and bonus combined) to approximately $500 million or more per year — although the exact level would depend upon how USDA calculates current “average” purchases. However, Administration officials have indicated that these new purchases would not increase Section 32 spending beyond current “baseline” projections, and that no new 3 This assessment can be accessed at []. CRS-6 legislation would be needed. Thus, it appears that the Administration intends to exercise its existing statutory authority to make these purchases. In other words, these proposed fruit and vegetable increases would be at the Administration’s discretion, not required by a change in the law. However, it is unclear how the Administration could avoid “new spending” unless it diverts some current Section 32 spending from other commodity purchases (e.g., of meat, poultry, fish) or from other potential Section 32 uses, such as future disaster assistance (see “Fiscal Year 2006 Spending,” above). Disaster Assistance In 2002 and again in 2004, the Bush Administration decided to use Section 32 to pay for special disaster initiatives. On September 19, 2002, USDA announced a “Livestock Compensation Program” to cover 2001 and 2002 drought losses by cattle, lamb, and buffalo producers in 37 states. From late FY2002 through FY2003, total Section 32 monies for this program reached just over $1 billion, a level that appeared to be unprecedented under Section 32, according to long-time observers. Some other producer groups and domestic food program interests had contended at the time that diverting so much money to these payments threatened the solvency of the contingency fund needed to make the many bonus purchases throughout the year for fruit, vegetable, poultry, pork, and other commodity groups suffering surpluses and/or low prices. Also, commodity recipients, especially food banks, pointed out that they rely heavily on Section 32 bonus foods (even though such foods are not entitlements) to help supplement their resources. To help pay for the disaster program and still cover “normal” contingency purchases, officials made several adjustments in various USDA spending accounts for FY2003. Strains on the Section 32 budget also were relieved somewhat when Congress approved a provision in the omnibus FY2003 appropriation (H.J.Res. 2) transferring $250 million from the CCC account to replenish the Section 32 account to carry out emergency surplus removals. The Administration again turned to Section 32 in late 2004 (i.e., early FY2005), taking $650 million from the account to make disaster payments to producers of fruits, vegetables, and nursery crops in Florida to compensate them for hurricane and/or disease losses. In a disaster assistance package included within the FY2005 Military Construction Appropriations Act (P.L. 108-324), Congress had transferred $90 million from the CCC account to the Section 32 account to cover some of this spending. Other Section 32 Uses USDA also uses its broad discretionary authority to spend Section 32 money on other activities. For example, in 1999 it used $54 million to make direct payments to hog producers affected by low market prices. Export subsidies and related activities also have been supported in the past. Section 32 funded a pilot food stamp program in the early 1960s, paid for production and diversion payments to other producers in past years, and supported several supplemental feeding programs. Congress itself periodically designates other uses. For example, it appropriated $75 million for Section 32 in a 1983 jobs law (P.L. 98-8), to purchase and distribute foods to needy families in high unemployment areas. Congress earmarked $10 million for the special purchase of sunflower oil in FY1988, and $50 million for a similar program in FY1994. An emergency FY1999 appropriation (P.L. 106-31) included an extra $145 million for Section 32 for hog producer payments during a period of extremely low prices.