Production Controls, Price Supports, and Current farm Programs Jessie Winfree & Cory Bowden.

Production Controls, Price Supports, and Current farm

Programs

Jessie Winfree

&

Cory Bowden

Fair Act of 1996

Annual lump sum payments known as production flexibility contract payments (Agricultural Market Transaction Act payments (AMTA)), were to be made to producers of wheat, feed grains, and cotton. Linked to previous production But independent of producer’s production in any

given year. Included loan rates for many commodities.

2002 Farm Bill

Generally increased the level of government expenditures

Loan rates were increased Marketing loans and LDP’s continued

for wheat, feed grains, and cotton Annual lump sum payments were

continued

Prior to Fair Act

Participation in price support programs for cotton, rice, wheat, and feed grains was voluntary to the producer.

In the tobacco program, participation was mandatory and production involved poundage and acreage controls.

The peanut program was similar to the tobacco program but had somewhat more flexibility in production.

Target Prices and Deficiency Payments Target prices were implemented in the Agriculture

and Consumer Protection Act of 1973. Target prices were the effective price-support level

in implementing wheat, cotton, rice and feed grain programs.

If market price fell below the target price, producers received direct government payments, referred to as deficiency payments.

Deficiency payments were based on a farm’s crop acreage base. (FSA offices maintained the records for these crop bases.)

The CCC and the Nonrecourse Loan Program The CCC continues to serve as the governments arm

for acquisition, storage, and sale of surplus commodities. Department within the USDA No operating personnel Activities are carried out through the FSA Borrows directly from the federal Treasury Two measures to increase prices:

1. Direct commodity purchases 2. Nonrecourse loans

The CCC and the Nonrecourse Loan Program In a nonrecourse loan, a participating farmer

obtains a loan from the CCC by pledging a specified quantity of a commodity as collateral.

They are made at a fixed rate per unit called the loan rate.

It provides a ready source of capital that permits the producer to store the commodity and delay marketing, thus retaining the potential to obtain a higher price later in the marketing season if the price increases above the loan rate.

Effects of a Target Price Program

Lost production from the acres taken out of production. Costs are incurred in planting a cover crop to place the land in a “conservation reserve.”

Input use is distorted because the acreage-reduction diverted productive land to lower-valued uses.

Decreased product supply.

Support Payments Not Linked to Current Production The Fair Act provided income support for eligible

producers of wheat, feed grains, cotton, and rice for the 7 year period from 1996-2002.

This removed the link between income-support payments and farm prices by providing for annual contract payments for 7 years.

The 1996 farm bill’s support for the producers of the affected commodities had 3 main elements:

1. A 7-year contract between the USDA and eligible producers 2. Planting flexibility 3. Contract payments

Loan Rates

Only producers who signed the 7-year production flexibility contracts were eligible for price support loans for wheat, feed grains, upland cotton, and rice.

All the production of these crops were eligible for loans.

Income Support for Soybeans and Other Oilseeds Prior to 1996, there was no target price

for soybeans. The price was supported through loans and purchases.

These producers did not have to sign a 7-year production flexibility contracts.

Income Support for Sugar

The Sugar Act of 1934 was the first federal sugar program. It has been in effect ever since, except for a period in the 1970’s.

The objectives of the program were to retain the production of sugarbeet and sugarcane production in the US and to ensure adequate sugar supplies at reasonable prices for the US consumer.

A primary policy tool has been the import quota, along with price supports, processing taxes, acreage allotments, production quotas, and assessments on producers.

The Tobacco Program

Why has government policy been so important in tobacco production?

**Tobacco has a high value per acre ($3,000-$4,000/acre).

There are 3 dimensions of tobacco policy: 1. Restrictions on smoking in public places

2. Efforts to reduce cigarette consumption

3. Producer price supports

The Tobacco Program

In 1965, the tobacco program was changed from an acreage allotment to a poundage marketing quota program.

An individual grower could sell no more than his poundage quota at the support price.

The tobacco had to be produced in the county to which it’s quota was assigned.

Owners had to produce their own quota, rent it in place, or sell it.

The Tobacco Program

This led to restricted overall output production because of two types of resource misallocations.

1. There was too little production

2. Restrictions on transfer of quota prevented production from moving from higher-cost to lower-cost production regions

The Tobacco Program

The tobacco program was terminated in October 2004.

Through the tobacco buyout, a grower can receive as much as $10/pound for the quota in their possession at the time of the buyout.

The buyout is funded by cigarette companies and importers.

The Honey Program

The honey program was instituted in 1950 as a result of events during and after WWII.

During the war, honey was given the status of a “war essential” commodity because it was a substitute for sugar and because beeswax was used to waterproof bombs.

The Honey Program

As prices dropped, beekeepers lobbied Congress for a price-support program.

They claimed that many of them were being forced out of business and argued that beekeeping was essential for agriculture because of the pollination services provided by bees.

The Honey Program

The honey program was sent to its grave in the 1990’s by unacceptable high Treasury costs that resulted from policy changes (increased support prices) that did not result from beekeepers’ lobbying effects.

During the most of its existence, the program provided minimal benefits to beekeepers.

The Honey Program

The fatal problem with the pre-1993 honey program was that when the market price fell below the loan rate, there were no restrictions on imports.

What makes the 2002 program different is that the tariffs on imports levied by the Department of Commerce reduce the attractiveness of imports and likely will keep Treasury costs from ballooning.

The Wool and Mohair Program The Agricultural Act of 1949 required

that support prices be set to encourage annual domestic production of 360 million pounds of wool.

The National Wool Act of 1954 established a system of direct “incentive payments” to farmers.

The Wool and Mohair Program A primary policy tool used in the wool

program was a tariff on imports. This tariff reduced the level of wool

imports into the U.S. and raised revenues.

These revenues were used to cover the costs of the direct payments to growers.

The Wool and Mohair Program Under this program, domestic consumers pay

more for wool and domestic producers receive a higher price for their wool.

The direct payments were a major portion of the revenues received by wool producers.

The increase in price associated with these payments probably increased U.S. wool production by approximately 16%.

The Wool and Mohair Program The wool program was one of the

program targeted for elimination by the Clinton administration (1993-2000).

Beginning in 1994, the direct payment portion of the program was phased out, and this price support for wool was terminated as of December 31, 1995.

The Wool and Mohair Program As a result of low market prices, Wool and

Mohair Market Loss Assistance Programs were implemented that made producers eligible for payments of 20 cents per pound for wool shorn in 1999 and (up to) 40 cents per pound in 2000.

Mostly recently, the 2002 farm bill includes provisions for marketing loans and LDP’s for wool and mohair.

The Wool and Mohair Program The wool program has been largely a

product of the lobbying efforts of the domestic wool industry.

A variety of reasons have been cited to justify the wool program, notably national security, but the rent-seeking theory of government action is the most persuasive.

The Wool and Mohair Program Mohair is the fleece from Angora goats. The U.S. is an important exporter of

mohair, with approximately 90% of U.S. production being exported.

The primary policy tool of the program is direct payments like those in the wool program.

The Wool and Mohair Program Approximately 80% of U.S. production

of mohair comes from a few counties in Texas.

As with wool, price supporters for mohair were phased out during 1994 and 1995, terminated as of December 31, 1995, and then reinstated in the 2002 farm bill.