THE 1996 UNITED STATES FARM ACT INCREASES MARKET ORIENTATION
The Federal Agriculture Improvement and Reform (FAIR) Act of 1996, which was made law in April 1996, is a sea change in United States agricultural policy. After 63 years, it ends the United States' agricultural support policy orientation established during the "New Deal" era by the Agricultural Adjustment Act of 1933. After a seven-year declining phase-out of government income support payments that will continue until 2002, direct support payments to United States farmers are scheduled to end. If this radical shift in farm policy is fully implemented and maintained, it will have major implications on United States farmers and, through them, on the world at large.
The new law completes the decoupling of production decisions from programme payments. Decoupling began in the 1985 farm law with the freezing of individual farm payment yields used to calculate deficiency payments, and continued in the 1990 farm law with the introduction of the so-called normal flex acres, which reduced the land area on which payment was to be made by 15 percent and allowed planting flexibility on these non-payment acres. Decoupling gives the FAIR Act the potential to affect the structure and performance of United States agriculture.
The FAIR Act departs from past policies by abolishing target prices and deficiency payments, thereby removing the link between income support payments and farm prices and eliminating the income-stabilizing feature of farm programmes implemented in the 1970s. Federal payments to crop producers and farm landowners under the new law will be somewhat lower than over the last decade. With the acreage reduction programmes (ARPs) eliminated, farmers will have far greater flexibility in making production decisions and the freedom to plant any crop, except for fruits and vegetables, on base acres. As a result, producers will become more reliant on the market as a guide for production decisions. Producers and landowners are also likely to experience greater farm income variability because FAIR Act payments are fixed amounts and not related to the level of market prices.
Pressure for reform
Developments from within the agricultural sector and forces from the general economy had both generated pressures for fundamental change in United States agricultural policy. Many farmers and policy-makers felt that the planting restrictions implemented during the 1980s were particularly limiting. Indeed, programme plantings were based on historical plantings dating back to the 1970s. Production technology and markets have changed in the meantime. The fact that the area eligible for programme payments was decided on the basis of the lesser of current plantings and a moving average of historical plantings had created an incentive for farmers to maintain historical production patterns. Farmers wanted increased planting flexibility, although farm legislation in 1990 had begun to address these concerns. In addition, many argued that the annual acreage reduction programmes, which put United States farmland out of production, provided an incentive for foreign competitors to expand production, thus reducing United States agricultural exports.
Apart from agriculture, increased concern for reducing the federal budget deficit strengthened pressures for reform. Farm programme costs were high and benefits were concentrated both geographically and among large-scale producers. Federal commodity programme outlays were highly variable - ranging from US$7 billion in fiscal year 1995 to a record $26 billion in fiscal year 1986.
The 1995-96 market setting also contributed to the reform effort. High commodity prices weakened the case for price and income support programmes and there were calls for reduced government intervention to free producers from government regulations and allow them to produce to meet the demands of the marketplace.
United States farm programmes altered
United States agricultural law encompasses a wide range of issues related to agriculture. Only the major changes related to production agriculture are discussed here.50 The FAIR Act fundamentally changed United States agricultural programmes for the so-called "contract crops" (wheat, maize, grain, sorghum, barley, oats, rice and upland cotton). Support to dairy production was phased down, while support for peanuts was reduced and the authority for setting marketing allotments (producer marketing quotas above which penalties apply) for sugar was repealed. Trade and food aid programmes were reoriented towards greater market development, with increased emphasis on high-value and value-added products for export. The FAIR Act extends many conservation and environmental programmes; in particular, the Conservation Reserve Programme is reauthorized.
Deficiency payments replaced by decoupled contract payments. The FAIR Act replaces the deficiency payment programme that was in place since the early 1970s with a new programme of decoupled payments for seven years. To receive payments and be eligible for loans on contract commodities, a producer must enter into a production flexibility contract for the period 1996-2002. The contract requires that the participating producer complies with existing conservation, wetland and planting flexibility provisions and keeps the land in agricultural uses. Cumulative outlays for FAIR Act contract payments for fiscal 1996-2002 are fixed at slightly over US$36 billion (Figure 11). Payment levels are allocated among contract commodities according to percentages specified in the FAIR Act (e.g. maize 46.2 percent, wheat 26.3 percent, upland cotton 11.6 percent, rice 8.5 percent, other feed grains 7.4 percent).
At the same time, planting flexibility increases. Under previous legislation, a producer's payments were reduced if more than 15 percent of the farm's base area for a crop was planted to other crops or if more than the total permitted area was planted. Farmers were often required to leave a portion of their cropland uncultivated under ARP as a condition for receipt of deficiency payments. Under the FAIR Act, ARPs are eliminated and participating producers are permitted to plant all of their contract area plus additional area to any crop (with limitations on fruits and vegetables) with no loss in payments, as long as they do not violate conservation and wetland provisions.
The FAIR Act retains a modified form of non-recourse commodity loans, the major government price support instrument. Farmers may receive a loan from the government at a designated rate per unit of production (loan rate) by pledging and storing a quantity of a commodity as collateral. The loan rates for most crops continue to be based on 85 percent of the preceding five-year average of farm prices, excluding high- and low-price years. However, maximum loan rates are specified in the new law at the 1995 level for most crops. Marketing loan provisions, which allow repayment of loans at the lower of the loan rate or market prices, are retained, thus continuing some income protection for the contract commodities and ensuring that no government-owned stocks accumulate as a result of forfeited loans.
Dairy price support phased out. In the United States, price support for dairy production is provided through government purchases of butter, non-fat dry milk and cheese to maintain fluid milk prices at designated price support levels. Producers pay for part of the cost of the programme through a marketing assessment of US$0.10 per hundredweight (about 45.4 kg). Under the FAIR Act, marketing assessments are eliminated; dairy price supports are phased down from US$10.35 per hundredweight in 1996 to $9.90 per hundredweight in 1999 and the programme ends on 1 January 2000. In 2000 a recourse loan programme starts, in which loans for butter, non-fat dry milk and cheese must be repaid with interest at loan rates equivalent to $9.90 per hundredweight of milk, to assist processors in the management of dairy product inventories.
The United States has a system of federal milk marketing orders, which are regulations issued by the Secretary of Agriculture specifying minimum prices and conditions under which milk can be bought and sold within a specified area. The orders classify and fix minimum prices according to the products in which milk is used. The 1996 FAIR Act consolidates the 33 federal milk marketing orders into between ten and 14 orders.
The Dairy Export Incentive Program (DEIP) is extended until 2002 and expanded to include market development activities. The Secretary of Agriculture is directed to use DEIP to the maximum extent permitted under the GATT Uruguay Round agreement.
Sugar programme modified. The sugar programme operates without net cost to the federal government. Sugar prices are supported through non-recourse loans offered to sugar processors. The raw cane sugar loan rate is still frozen. Under the FAIR Act, the refined beet sugar loan rate is also frozen at its 1995 level. Non-recourse loans51 are available only when the tariff-rate quota on sugar imports is at or exceeds 1.5 million short tons (i.e. slightly less than 1.4 million tonnes). The loans become recourse, that is the borrower must repay with cash and cannot choose to repay with the commodity, when the tariff-rate quota is less than 1.5 million short tons. Marketing assessments are paid on all processed sugar. The assessments were increased by 25 percent under the FAIR Act. Under previous legislation, USDA had authority to implement domestic sugar marketing allotments, but this authority has been repealed.
Major trade provisions made more specific. Trade and food aid programmes are reoriented towards greater market development with increased emphasis on expanding high-value and value-added product exports. Annual Export Enhancement Program (EEP) expenditures are capped (Figure 12). In addition, total EEP funding during fiscal 1996-99 is more than US$1.6 billion below the maximum levels permitted under the Uruguay Round agreement. During the 1995/96 crop year, however, the United States made only limited use of EEP because world prices were high and spending was well below the levels allowed under the Uruguay Round agreement. As long as markets remain tight, the United States is likely to continue to make limited use of EEP.
The Market Promotion Program52 is renamed the Market Access Program and its funding authority is capped at an annual US$90 million for fiscal 1996-2002. The bill authorizes PL (public law) 480, Title I (long-term concessional sales) agreements with private entities in addition to foreign governments. Other major changes to PL 480 broaden the range of commodities available for PL 480 programming, provide greater programme flexibility and improve the operational and administrative aspects of the Market Promotion Program. The Food Security Commodity Reserve, which was formerly know as the Food Security Wheat Reserve, is expanded to include a total of 4 million tonnes of rice, maize and sorghum, in addition to wheat, all of which can be used to meet humanitarian food aid needs.
Major conservation provisions. The FAIR Act addresses a wide range of environmental and conservation programmes. Many of these programmes were simplified to make them more consistent and workable. The primary conservation programme is the voluntary Conservation Reserve Program (CRP), under which producers submit bids to retire environmentally sensitive cropland from production for ten to 15 years. Producers receive annual rental payments for retiring the land and maintaining specified conservation practices. Under the FAIR Act, the maximum CRP area is capped at 36.4 million acres (14.7 million ha), the current level of enrolment. Farmers can remove less environmentally sensitive land from the programme prior to expiry of the contract if it has been enrolled for at least five years. Programme land in expiring contracts or in contracts terminated prior to expiry is eligible to be enrolled in production flexibility contracts on leaving CRP. New land can be enrolled in CRP to replace the land in expired contracts or early termination or current land can be re-enrolled at contract expiry.
General impacts of the new legislation
The FAIR Act accelerates trends of the previous two major farm acts towards greater market orientation and reduced government influence in United States agriculture. The trend towards fewer but larger farms is expected to continue. The sector will remain highly competitive, with successful producers requiring strong technical and managerial skills. The reduced role of government programmes will make farmers more vulnerable to supply and demand shocks, so such alternative marketing arrangements as marketing contracts and integrated ownership are likely to be used more to manage price and production risks. The following focuses on four areas of potential impacts and concludes with a discussion of the effects on net farm income.
CRP. The amount of cropland enrolled in CRP will play a significant role in determining the impacts of the FAIR Act on United States agriculture. In 1995 almost 100 million ha of cropland were planted to contract crops and soybeans. About 2 million ha were left uncultivated under ARP, compared with about 14.7 million ha left uncultivated under CRP. CRP thus represents a significant source of potential cropland in the United States.
USDA has authority under the FAIR Act to establish targets for the level of CRP enrolment and the composition of the land enrolled. Farmers will decide whether they want to keep land in CRP or to farm it and receive FAIR Act contract payments on eligible land. There is, therefore, considerable uncertainty regarding future CRP enrolment. Prior to the enactment of the FAIR Act, many analysts expected enrolment to decline from 1995's 14.7 million ha to between 10 and 12 million ha by 2002. The provisions of the FAIR Act suggest similar levels of total enrolment, but the composition by crop of the enrolled area could change depending on the environmental criteria selected for enrolling new land and extending previous contracts.
Contract commodities and soybeans. With the removal of ARPs and planting constraints, the FAIR Act increases farmers' planting flexibility. Production patterns are likely to shift at the farm level and regionally to take advantage of regional differences in the comparative benefits of producting specific crops. The impacts of the programme will vary from region to region reflecting the mix of agricultural products produced, the degree of diversification and the production alternatives used. In the past, programme constraints may have inhibited such shifts.
In aggregate, however, under the FAIR Act the national level of cropland planted to most of the major field crops will be similar to the levels that would have occurred under previous legislation, with planted area increasing by 2 to 4 million ha over the next ten years from 99.4 million ha in 1995. Under previous legislation, the role of government programmes was already declining and government payments were largely decoupled from producer planting decisions at the margin. The 15 percent normal planting flexibility was sufficient in aggregate to attain crop and commodity supply response equilibrium. Aggregate planting levels for wheat, feed grains and soybeans are therefore expected to be similar under the FAIR Act to what they were before - changes in plantings for these crops will largely be related to overall changes in the size of CRP.
Plantings for rice and cotton, however, will change under the FAIR Act. Rice production is expected to decline in regions such as southwestern Louisiana and Texas where production costs are high, primarily reflecting the elimination of the 50 percent planting requirement to receive payments under previous legislation and increased planting flexibility. The upland cotton area could become slightly higher. If previous legislation had continued, upland cotton would have been the only crop expected to be required to leave land uncultivated under ARP. The elimination of ARPs would free additional land for production. Furthermore, cotton has been the only crop over the past five years to have seen a net gain in area planted caused by the planting flexibility provision of the 1990 Farm Act, which suggests favourable market returns compared with other crops. Some cotton area could, however, move to other crops, thus offsetting much of the potential for increased cotton plantings, as producers use the additional planting flexibility under the FAIR Act to guard against production and income variability.
Dairy. The FAIR Act modified the dairy price support and federal orders programmes by phasing out price support and consolidating milk marketing orders. The rate of growth in milk production is expected to slow in response to the lower prices and reduced net returns to dairy farming. The consolidation of milk marketing orders may have regional price implications. Impacts on other parts of the livestock sector are expected to be minimal as feed costs under the FAIR Act are expected to be similar to those under previous legislation.
Sugar. Elimination of the authority for sugar marketing allotments may create opportunities for more efficient sugar producers to increase production. Any expansion, however, is likely to be constrained by the possibility of recourse loans being triggered if the tariff-rate quota on sugar imports falls below 1.5 million short tons. The most likely scenario is for the United States to remain a sugar importer with total production at similar levels to those expected under previous legislation. The expansion of sugar-beet production in certain regions is likely to be offset by declines in sugar-cane production. Again this is primarily a continuation of trends that were occurring under past legislation.
Export markets. The FAIR Act should make United States agriculture more competitive in world markets. Even if prices drop to support levels, marketing loan provisions, whereby borrowers are allowed to repay non-recourse loans on the basis of the world market price when that price is below the loan rate, will help ensure that there is marketing rather than accumulation of government-owned stocks. Against a backdrop of strong global economic growth and liberalized trade under the Uruguay Round agreement, the FAIR Act will allow producers to respond to market signals. Export Enhancement Program (EEP) expenditures add little to exports when prices are high, so reduced EEP spending under the FAIR Act will mean only minimal reductions in United States exports of wheat and barley while prices remain high. Elimination of authority for ARPs and suspension of the Farmer Owned Reserve mean that the United States will not restrict supplies available to the marketplace to support market prices. Greater planting flexibility will permit faster adjustments in United States production in response to changing world market conditions. Reorienting trade programmes towards market development may also enhance their effectiveness.
Farm income implications. Farm incomes are expected to be somewhat higher under the FAIR Act than under a continuation of previous agricultural legislation. This largely reflects higher government payments to farmers under the act, as production flexibility contract payments exceed projected deficiency payments that held under previous farm legislation. Furthermore, changes in the timing of payments to farmers provide an additional boost to farm income in the first year of the programme - pushing 1996 net incomes up by over US$4 billion. Dairy sector receipts should be lower under the FAIR Act after 1996 as a result of reduced support, with the elimination of the dairy assessment partly offsetting the lower support. Net rents to non-operator landlords should be higher under the FAIR Act as higher government payments increase land values.
The effects of market risk on net farm income will increase, with incomes becoming more variable as farmers place greater reliance on the market for revenue. Net farm income is more variable under the FAIR Act because government payments are no longer linked to market prices. Loan rates, which remain but at relatively low levels, continue to provide some income protection.
Farmers will continue to face the pressures of moving to a market economy under the new farm legislation. They will need improved skills to operate in this arena of greater income volatility with less government support to mitigate downturns in income. When making production, marketing and financial decisions, farmers will need to pay increased attention to risk management in order to deal effectively with year-to-year fluctuations in income. Many farmers will need to refine or develop new skills in the use of savings and investments, the use of futures and options markets, forward contracting and other marketing arrangements.
The Federal Agriculture Reform and Improvement Act of 1996 furthers the market orientation of the United States agricultural sector in a number of ways. First, it completes the decoupling of farmers' production decisions for major crops from government payments by widening planting flexibility to cover the entire farm (except for limitations on planting fruits and vegetables). Second, it eliminates annual supply control programmes by ending the acreage reduction programmes. Third, government payment rates are no longer inversely related to the level of prices that farmers receive.
Aggregate crop production is expected to increase over time in response to growing domestic and international market conditions and trends. The FAIR Act should improve United States agriculture's ability to compete in world markets. Under the act, United States market prices should reach levels at which exports will adjust to prevent stock buildups.
While the Act will end direct support to United States farmers by 2002, it still remains to be seen whether the government will have the political will to implement the new policy even during periods of adverse production or marketing conditions.
50 The provisions of the FAIR Act are summarized and compared with previous law in E. Young and D.A. Shields. 1996. 1996 FAIR Act frames farm policy for seven years. Agricultural Outlook Supplement, Economic Research Service, United States Department of Agriculture (USDA), April 1996.
51 Farmers or processors may pledge a quantity of a commodity as collateral and obtain a loan from the Commodity Credit Corporation (CCC). The borrower may repay the loan with cash or forfeit the commodity to CCC (the government has no alternative but to accept the commodity as payment).
52 The government provides funds for export market promotion. Participating organizations include non-profit agricultural trade organizations, regional trade groups and private companies.