Conklin, Neilson C.

Dixit, Praveen M.

Nelson, Frederick J.

Young, C. Edwin

English

Research Papers in Economics

POLICY DEVELOPMENTS  IN UNITED  STATES
AGRICULTURE  SINCE  1986
Edwin Young,  Frederick Nelson, Praveen Dixit, and Neilson Conklin
INTRODUCTION
U.S.  agricultural policy has shifted  towards increased market  orienta-
tion and more reliance  on non trade-distorting or "green box"  programs.  The
1996 Farm Act substituted decoupled income  support payments  for price  sen-
sitive  deficiency payments.  However,  price  sensitive  marketing  loan  related
benefits increased in importance  in 1998 and 1999 with low market prices.  In
addition,  acreage supply  control programs were  terminated  in the  1996 Farm
Act.
OVERVIEW  OF  CHANGES  TO  POLICY  ORIENTATION
The  focus  of government  spending  is  shifting  towards  more  market
orientation with increased  reliance on non trade-distorting or "green box" pro-
grams as defined by the World Trade Organization (WTO) Agreement on Agri-
culture.  A decoupled income  support program (production flexibility contract
payments) has replaced the price-sensitive target price/deficiency payment pro-
gram.  Planting flexibility increased  under the  1996 Farm Act.  The  acreage
reduction program (ARP)  was eliminated.  Producers  now have  the flexibility
to plant any program  crop on contract  acres,  as long  as the producer does notYoung,  Nelson, Dixit, and Conklin  99
violate conservation and wetland provisions and some limitations on fruits and
vegetables.
Price support levels are capped.  Marketing  loan provisions for grains
and oilseeds changed  the commodity loan program  from a price  support pro-
gram to more of an income support program.  Expenditures  on long-run con-
servation reserve  and environmental  cost-share programs have  increased.
The Organization for Economic Cooperation and Development (OECD)
uses the Producer Support  Estimate (PSE) as  an indicator of the annual mon-
etary  value  of gross  transfers  from consumers  and  taxpayers  to  agricultural
producers arising from policy measures which support agriculture. The United
States  percentage PSE was  less than the  1986-88  average percentage  PSE all
during  1989-1999.  It moved up close to the 1986-88 percentage  by  1998  and
1999  due  to  the lower  market  prices and  increased  benefits  from loan  defi-
ciency  payments, marketing loan gains,  and emergency legislation.
MONITORING  AND  EVALUATING  AGRICULTURAL  POLICIES
The following sections describe agricultural policy and policy changes
in the United States,  1986 to 1999, based on the policy measures and categories
used in the OECD monitoring  of producer and general  support to agriculture
(the PSE's and the GSSE).
Market  Price Support (MPS)
The United States provides market price support by guaranteeing mini-
mum prices for commodities.  This is accomplished  through:  (1)  non-recourse
commodity  loans  for crops  at  predetermined  per-unit  loan rates,  with occa-
sional acquisition  of crop production used as  collateral for the loans,  (2) gov-
ernment  purchases  of dairy  products  at predetermined  support  prices,  com-
bined with a system of classified pricing in several regulated Federal milk mar-
keting regions, or "orders,"  and (3) application of import restrictions, which are
currently  WTO-related  tariff-rate-quotas
Program Changes.  Commodity loan provisions have been revised to greatly
reduce the extent of government  stock accumulation  at low market prices.  For
99 Young,  Nelson, Dixit, and Conklin100  NAFTA  - Report Card on Agriculture
most crops, minimum  commodity  loan rates  are now derived  from  a formula
based on  a percentage  of a moving  average  of recent past prices.  Maximum
loan rates were established for most program crops.  Provisions now available
for most loan commodities allow producers to repay loans at less than the original
loan rate  when market  prices are  below  loan levels,  resulting in a "marketing
loan gain"  that is equivalent  to a per-unit direct payment.  Alternatively,  pro-
ducers may forgo obtaining a loan and receive this same per-unit benefit in the
form of a "loan deficiency payment."  Provisions for special reserve loans and
reserve  storage  payments  on farmer-owned  grain  were  suspended  in  1996.
Effective  loan rates for sugar and peanuts were reduced  in  1996 and are  to be
held constant  through 2002.
Export Subsidies
While  not guaranteeing  minimum prices, the use of export  subsidies
(the Export Enhancement  Program  and  the  Dairy Export Incentive  Program)
can  facilitate  maintenance  of domestic  price  levels  over  world market  price
levels,  reducing  the role of loans,  acquisitions,  purchases,  and import restric-
tions  in supporting  domestic market prices.
The Export Enhancement Program has not been used in recent years.
The  1996 Farm Act requires  the Secretary  to  operate  Dairy  Export Incentive
Program  in order  to maximize  the  amount  of exports  consistent  with WTO
Agreement on Agriculture obligations.
Dairy  Program
U.S. dairy  policy includes  a system of Federal  milk marketing  orders
designed to facilitate marketing  of milk by specifying conditions under which
milk handlers  must operate  within certain  geographic areas  and price support
provided through government  purchases.
Program Changes.  The  1996 Farm Act called for consolidation of the dairy
marketing orders (to be reduced from 33 orders to 10 -14 orders).  Market order
reform was implemented on January  1, 2000.  Dairy support prices were gradu-
ally reduced from 1997 through  1999, and were scheduled to end on January 1,
2000.  However, low prices during the fall of 1999 and delays in reaching agree-
ment on Market Order reform resulted in a one-year extension  of the program.
100 NAFTA  - Report Card  on AgricultureYoung,  Nelson, Dixit, and Conklin  ]0]
The Northeast Interstate Dairy Compact  was authorized in the  1996 Farm Act
to provide for an increase in the regulated price of Class I milk marketed in the
compact region. Although authorization for the Compact was to end with imple-
mentation  of market  order reform,  the authorization  was  extended until  Sep-
tember  30, 2001.
Direct Payments
The United States currently provides  direct payments  and input subsi-
dies to producers  in several  different  ways,  including  (1)  decoupled  income
support payments-payments  not related  to current production,  prices  or re-
source use;  (2) commodity loan related payments  and interest subsidies  linked
with current market prices and production; (3)  natural-disaster related payments
and subsidies using crop insurance,  revenue insurance, and ad hoc disaster re-
lief programs;  (4) emergency income  transfers  to compensate for low market
prices  and lost markets;  (5)  income-based  benefits  due to Federal income  tax
provisions;  (6)  subsidies  on inputs such as water,  grazing  land,  fuel, advisory
services,  and  feed;  and  (7)  payments  to  support and encourage  conservation
and environmental-oriented  practices.
Program Changes.  Decoupled payments: The  1996 U.S. Farm Act fun-
damentally  changed  agricultural  income  support  programs  by replacing  the
price-sensitive  target price/deficiency  payment program  with a new  program
of predetermined  income  transfers  that are not related  to  current  farm-level
production  decisions  or market prices.  Total  outlays for the new  production
flexibility  contract  payments  were  capped  at  slightly over  $36  billion  for 7
years,  1996-2002.
Planting flexibility:  Planting  flexibility  increased under  the  1996 Farm Act.
Participating producers  are permitted to plant 100 percent of their contract acre-
age  plus  any other  cropland  acreage  to  any  crop (with  some  limitations  on
fruits and vegetables)  with no loss in payments,  as long  as the producer does
not violate conservation  and wetland provisions.  Authority  for acreage reduc-
tion programs  (ARPs) and other planting regulations was eliminated.
Risk management: Assisting producers in the use of risk management prac-
tices is an increasingly important policy goal in United States agriculture.  The
Young, Nelson, Dixit, and Conklin 101102  NAFTA  -Report Card on Agriculture
1994 Crop Insurance  Reform Act provided  new,  low-cost catastrophic  cover-
age and instituted procedures to restrict enactment of disaster assistance.  Crop
and revenue  insurance,  provided  through  private  insurance  companies,  give
producers  an important income safety net.  USDA's Risk Management Agency
provides  direction  and financial  support to  the  insurance  companies  and di-
rectly subsidizes  producers by setting below-cost insurance  premiums.  In ad-
dition, educational and pilot programs are provided to help farmers learn more
about risk management  tools.
Emergency and disaster  relief payments: Although crop insurance reform
legislation  in  1994  included  language  intended to  eliminate  ad hoc  disaster
assistance programs that have been used occasionally,  emergency spending leg-
islation enacted in  1998  and  1999 included  disaster assistance for crop  losses
as well as direct "market loss assistance"  and other payments  to the sector.  The
total spending on these programs  amounted to about $15 billion.
Input subsidies:  In addition to  changes  in subsidized  insurance  and emer-
gency  programs,  the United  States  made  several  changes  or refinements  for
subsidies  related  to use  or limitations  on  the use  of farm inputs.  The  most
significant change during  this period involved the implementation of the Con-
servation Reserve  Program (CRP), initiated in 1986.  The  1990 and 1996 Farm
Acts extended  the CRP.  Higher environmental  and conservation criteria pro-
vide that new acreage  must provide  significant  soil erosion,  water  quality, or
wildlife benefits.  New rules introduced in  1998 expanded the number of acres
eligible to enter the reserve  to over two-thirds  of total crop land.
Other new programs: Also introduced  during  the period was the Wetlands
Reserve  Program, designed  to protect wetlands or return cropped  land to wet-
land status.  The Environmental Quality Incentives Program (EQIP) introduced
in  1996  simplified  and  consolidated Federal  conservation  and environmental
cost  share programs.  EQIP involves  technical  assistance  and direct  payment
incentives to implement certain practices.  At least half of the funding must be
allocated to livestock operations.  Other direct assistance programs implemented
involve flood risk protection and farmland protection through purchase of ease-
ments.
102 NAFTA  -Report Card on AgricultureYoung,  Nelson, Dixit, and Conklin  103
Income tax regulations: The Taxpayer Relief Act of 1997 reduced taxes gen-
erally  and gave  farmers  several  relief measures  that they  had  requested.  In
particular, capital gains rates were reduced, loss carry-back provisions (income
averaging)  were provided, and estate tax exemptions were increased.  The Tax
and Trade Relief Extension Act of 1998 extended the loss-carry back to 5 years,
made income averaging  permanent, and provided acceleration of self-employ-
ment health insurance  deductibility.
General  Services  Support Estimate
The  General Services  category  of support includes assistance  to agri-
culture in general, rather than direct subsidies to producers in the form of higher
prices  or payments.  United States programs  in order  of importance,  as  mea-
sured by  1998 outlays include:  (1) domestic  food assistance  through the food
stamp program,  (2)  agricultural research  and  development  programs,  (3)  for-
eign  assistance  and  other marketing  and promotion  programs,  (4)  miscella-
neous  state expenditures  on  agriculture,  (5)  inspection  services,  and (6)  off-
farm rural infrastructure  development.
SUMMARY  AND  CONCLUSIONS
The  market-orientation  of United States'  agriculture policy  increased
since  1986-88.  The  focus of government  spending  is shifting  to  non trade-
distorting  or "green box" programs  as  defined by the World  Trade Organiza-
tion (WTO) Agreement on Agriculture.
* Income support programs are more market oriented.  Payments
based on historical production were  substituted for deficiency
payments  tied to current prices with acreage constraints.
* Price supports were capped,  with the grain and oilseed programs
restructured to substitute direct payments  for price support through
stock  accumulation.
* While emergency legislation in  1998 and  1999 provided market
loss payments  to compensate for recent price declines,  nevertheless
the payments were made after production  decisions occurred and
were also based on historical rather than current production  levels.
103 Young,  Nelson, Dixit, and Conklin104  NAFTA - Report Card  on Agriculture
* Recent policy changes  are focusing on improving the farm safety
net and helping farmers manage risk.  A variety of new and innova-
tive crop and revenue insurance options  are being  offered to
farmers through private insurance companies.  In addition, USDA's
Risk Management Agency provides educational  and pilot programs
to help farmers learn more about risk management tools.
* Environmental  concerns  are increasingly being addressed through
agricultural policy with programs  targeted to soil conservation,
water quality  and wildlife habitat.  The Conservation  Reserve
Program  has grown to include over 30 million acres  since its
inception  in 1986.

POLICY DEVELOPMENTS IN UNITED STATES AGRICULTURE SINCE 1986

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