Commodity Programs

Reform in U.S. agricultural policy began with passage of the 1985 farm act, which sought to make federal farm programs more market oriented and to reduce the amount of support that the government guarantees farmers for their commodities. The 1990 and 1996 farm acts continued to build on these efforts. However, Congress retained several income- and price-support provisions as a safety net for producers. In particular, nonrecourse loans with marketing loan provisions continue to be available for a number of commodities, including cotton, rice, wheat, feedgrains, and oilseeds. This report answers the following questions: (1) Do marketing loan provisions prevent loan rates from acting as price floors and do they allow U.S. prices to fall to levels that are closer to world prices? (2) How would lower loan rates affect the relationship between U.S. and world prices? (3) How would a lower loan rate affect step two payments for cotton exports and what impact have recent changes in the timing of payments had on the program's effectiveness? (4) What steps could be taken to make the peanut and sugar programs more market oriented?

GAO found that: (1) when alternative repayment rates, which are derived from the U.S. Department of Agriculture's (USDA) proxies for world prices, are near or below the loan rates, the marketing loan provisions may prevent the loan rates from serving as price floors; (2) lowering the loan rates has little if any effect on U.S. prices when alternative repayment rates are above the loan rates; (3) however, when alternative repayment rates are near or below the loan rates, the effect on U.S. prices of lowering the loan rates differs by commodity; (4) for cotton and rice, the availability of nonrecourse loans, in combination with other program and market factors, keeps U.S. prices significantly higher than adjusted world prices; (5) therefore, lowering the loan rates is likely to allow U.S. prices to fall to levels that are closer to adjusted world prices; (6) for wheat, feedgrains, and oilseeds, most experts assert that the marketing loan provisions will work as intended to overcome the price-supporting effects of the nonrecourse loans; (7) for these crops, lowering the loan rates would have little if any impact on U.S. prices; (8) to the extent that a lower loan rate results in lower U.S. cotton prices, step 2 payments would be reduced but not eliminated; (9) step 2 payments would continue to be made because the marketing loan provisions have not been able to overcome the cotton program's other features, such as government-paid storage, that help keep U.S. cotton prices higher than adjusted world prices; (10) however, because of recent changes in how USDA makes step 2 payments to exporters, these payments may no longer directly offset higher U.S. prices and therefore may be less effective in enhancing exports; (11) further changes can be made to make the peanut and sugar programs more market-oriented; (12) additional reductions in the quota support price for peanuts will lower U.S. prices and increase economic efficiency; (13) an increase in the tariff-rate import quota for sugar, allowing more sugar to be imported at the lower tariff rate, or its elimination entirely (no import restrictions), would result in lower U.S. prices; and (14) once prices fall to the level of the loan rate, reductions in the loan rate would be necessary to reduce prices further.