Farm Commodity Programs:
An Overview

Background

Farm commodity programs are administered by the United States Department of Agriculture (USDA) with most financial transactions handled through the Commodity Credit Corporation (CCC), a federally owned and operated corporation within the USDA. The commodity programs are authorized by three basic statutes: the Agricultural Adjustment Act of 1938, the Agricultural Act of 1949, and the Commodity Credit Corporation Charter Act of 1948. These statutes are modified by the farm bills, which generally guide commodity programs for six years, and other emergency or temporary legislation, which affects the programs for shorter periods of time.

Throughout American history the federal government has used its legislative power to promote farm policies, and commodity programs are a direct extension of those policies. Depending on how the term "farm commodity program" is defined, programs have existed since the late 1700s. From that time until the beginning of the 20th century, federal legislation developed that provided free land to anyone willing to settle and farm it, creating an independent family farm system. Although not targeted specifically at commodities, the net result was an increase in commodity production. During the mid-1800s and continuing through the 1920s, federal farm policy focused primarily on education, research, and some marketing assistance. Legislation during this period created the Cooperative Extension Service and exempted farmer cooperatives from antitrust regulation in an effort to improve farm production and marketing. This legislation helped improve farm productivity, but farm income was still unstable and often low.

The Great Depression era and President Franklin Roosevelt's New Deal legislation combined to create the farm commodity programs as they are currently known, programs designed to support prices and incomes through the use of supply controls. This type of commodity program continued through the 1996 Farm Bill, when commodity programs began shifting into a market-oriented system with decreased income supports and increased planting flexibility. Declining prices for several years after the 1996 Farm Bill resulted in expensive emergency support legislation from Congress for producers, and the 2002 Farm Bill was enacted to avoid those expenses. The 2002 Farm Bill continues many of the market transition commodity programs of the 1996 Farm Bill, but adds additional price support measures. This overview focuses on the farm commodity programs of the 2002 Farm Bill, the Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-171, 116 Stat. 134 (to be codified in scattered sections of titles 7, 15, 16, and 21 of the U.S.C.). For text, history, analysis, and background information on past and present United States Farm Bills, please visit our United States Farm Bills page.

Direct Payments

Under the 2002 Farm Bill eligible producers may receive direct payments (DP) for covered commodities such as wheat, corn, grain sorghum, barley, oats, upland cotton, rice, soybeans, sunflower seed, rapeseed, canola, safflower, flaxseed, and mustard seed. These direct payments are fixed and decoupled with amounts calculated based on formulas in the Farm Bill.

Because the payments are fixed, they are the same each year for the duration of the Farm Bill. The amount is determined by using the producer's production history and calculations in the Farm Bill. The payment rate, established in the Farm Bill for each commodity, is multiplied times the producer's payment acres, derived from calculations of past acreage planted, and the payment yield, derived from production history yields, to establish the amount of the direct payment for each year.

Since the direct payment is also decoupled from production, producers are free to plant almost any crop on the covered land or not plant any crop at all. However, producers may not generally plant fruits or vegetables or convert the land to nonagricultural uses, and they must comply with conservation and wetland protection obligations.

"Sodbuster" and "Swampbuster" are the two principal environmental protection requirements. These programs remove some incentives for the conversion of highly erodible land and wetlands into crop land. If producers convert the protected land into crop land, they become ineligible for farm commodity program payments.

Counter-Cyclical Payments

Counter-cyclical payments (CCPs) are designed to provide an income safety net for eligible producers by providing them with the difference between a commodity's effective price and the target price defined in the Farm Bill. CCPs are available for the same covered commodities as the direct payments and have the same restrictions for planting fruits and vegetables, maintaining agricultural uses, and meeting conservation obligations.

CCPs are made when the commodity's effective price falls below the target price. The effective price is the sum of the average commodity price and the amount of the direct payment rate defined in the Farm Bill for that commodity. The target price is the price for each of the covered commodities specified in the Farm Bill. The payment rate of CCPs is the difference between the target price and effective price when the effective price drops below the target price. The amount of the CCP is the product of the payment rate, based on the above calculations; payment acres, derived from calculations of past acreage planted; and payment yield, derived from production history yields.

Marketing Assistance Loans

Marketing assistance loans (MALs) are short-term nonrecourse loans to producers who use covered commodities as collateral. These loans are designed to provide producers with cash at harvest and allow them to market the commodities throughout the year. Because the loans are nonrecourse, producers may forfeit the collateral in full satisfaction of the loan. Thus, when market prices drop below loan rates, MALs become an income support tool. The covered commodities under the MAL program are the same commodities as the DP and CCP commodities and also wool, mohair, honey, peas, lentils, and chickpeas.

Due to government expenses associated with the storage and disposal of forfeited commodities, repayment provisions are designed to discourage forfeiture. When market prices are below loan rates, producers may repay the loans at local market rates determined by the USDA and retain title to the commodity for future marketing. The lower repayment rate provides farmers with a marketing loan gain and the ability to sell the commodity without creating a large government-owned surplus.

Another method used to prevent a large government-owned surplus of farm commodities is a loan deficiency payment (LDP). LDPs are a part of the MAL program and provide the same benefit to producers as marketing loan gains without the burden of storing the commodities and the paperwork associated with receiving the marketing loan. Producers that agree not to acquire marketing loans are eligible for the LDP. The LDP is calculated as the difference between the loan rate and the alternative repayment rate.

Peanuts

Under the 2002 Farm Bill, peanut production is shifted from a quota system to a system using DPs, CCPs, and MALs. The peanut program follows the same general outlines as the covered commodity programs discussed above. In addition, holders of the repealed peanut quotas receive payment based on the lost value of that asset.

Dairy

The Farm Bill utilizes several programs to assist dairy farmers. Milk marketing orders classify and set minimum prices for milk based on its intended use. Milk price support is also facilitated by government purchases of butter, dry milk, and cheese. Dairy market loss payments also provide producers with payments when milk prices fall below a certain amount in Federal Milk Marketing Order 1, and subsidies are provided to milk exporters.

Sugar and Tobacco

Under the direction of the Farm Bill, both sugar and tobacco commodity programs are intended to operate at no net cost to the government. These programs utilize quotas, allotments, and nonrecourse loans in an effort to support market prices.

Discretionary Commodity Programs

The USDA is authorized to use discretionary funds to support nearly any farm commodity as deemed necessary. These programs are often used to purchase surpluses of agricultural commodities or to provide producers with disaster relief.

Payment Limitations

The 2002 Farm Bill limits the amount of commodity program payments that an individual or entity can receive. A producer is ineligible to receive DPs or CCPs if his or her three-year average adjusted gross income exceeds $2,500,000.00, unless 75% comes from agricultural operations. An individual or entity is also limited to $40,000.00 in direct payments, $65,000.00 in counter-cyclical payments, and $75,000.00 in marketing loan gains. However, the three-entity rule allows a producer to receive twice the total limit amount by receiving one full limit on a farm and then two one-half limits on an additional two farms.

Limits on marketing loan gains may be avoided because there is no volume or monetary limit on the amount of commodities that may be put under loan and forfeited to the CCC. This allows producers to put commodities under loan and capture marketing loan gains while retaining those commodities up to the payment limit and then forfeiting the surplus commodity that would be above the payment limit. The commodity certificate program also allows the recovery of the forfeited commodities above the payment limits. Producers may purchase commodity certificates for the same price as the reduced loan repayment price up to the amount of commodity under loan and immediately redeem the certificates for the commodity used for loan repayment, and the certificates do not count toward the payment limit.