The Food, Agriculture, Conservation, and Trade Act of 1990 that was recently signed by President Bush covers the 1991-1995 crops. The Act keeps the direction of farm programs on the same general track that was laid down in the 1985 Act. However, provisions of the Act clearly provide for a reduction in government payments over the next five years. Cost estimates for the original House and Senate versions off arm legislation for the 1991-1995 period were projected to be about $54 billion. The Bill that survived the budget reconciliation process is estimated to cost $40 billion over the next five years, mainly for commodity programs. In contrast, budget outlays for the 1985 Bill when it was passed were estimated to be $80 billion for the 1986- 1990 period. Actual market prices and export performance will be major determinants of the final program costs over the 1991-1995 period.

Although the new Act provides the general direction for future commodity programs and the level of price and in­come support, some of the program details await administra­tive decisions. Also, the Act may have to be modified in 1991, depending upon specific international trade agree­ments being negotiated under the General Agreement on Tariffs and Trade (Uruguay Round of GATT talks).

Basic Provisions

This article discusses the main provisions of the Act with emphasis on changes from the 1985 Act and some of the program implications for 1991. The House and Senate bills froze target prices for grains at the 1990 level. When the Conference Committee was instructed under the budget deficit reduction legislation to cut $13.6 billion from the separate five- year bills originally passed by the House and Senate, it chose to leave target prices at current levels but reduce the proportion of base acres eligible for payments and to provide some flexibility for farmers’ planting decisions.

Triple base. The so called “Triple Base” concept is the principal source of government cost savings. It reduces the acreage eligible for price and income supports by 15 percent in each of the next five years. In effect, it is a 15 percent reduction in direct payments to farmers. The 15 percent is calculated from base crop acres before the acreage reduction program is determined.

In order to spread the cost of the cuts across crops that receive benefits but not deficiency payments, a special assessment was made on those producers. For example, soybean producers who use the loan program will have to pay a loan origination fee of two percent, effectively reducing the loan rate by about 10 cents per bushel. Flexibility is introduced by allowing farmers to plant 15 percent of their base acres to any program crop; to oilseeds such as soybeans, canola, or sunflowers; and to any other non­program crop except fruits and vegetables. The USDA was given authority to specify other prohibited crops. Crops produced on the 15 percent of base acres are not eligible for deficiency payments but are eligible for price support loans.

Another 10 percent base crop acre reduction is optional for producers. Guidelines are the same as for the triple base, but there are limits placed on soybean plantings on this 10 percent. Soybeans may not be planted on this 10 percent if the Secretary of Agriculture determines the season average price would be less than 105 percent of the loan rate.

These provisions that allow up to 25 percent of base acres to be planted to soybeans is similar to the programs in effect for 1989 and 1990 which were authorized by the Disaster Assistance Act of 1988. With that Act, com or wheat base acres planted to soybeans were not eligible for corn or wheat deficiency payments. Consequently, the switch from the program crop to soybeans was very small. However, under the new rules, the switch will likely be larger as payments will not be made for the program crop on 15 percent of the acres. So, in effect, the program crops without the deficiency payment will be competing with soybeans for those acres. Thus, the planting decision on 15 percent of the base acres will be based on market prices and not government support prices.

The flexibility and triple base features are a concern to wheat farmers in the Great Plains and cotton and soybean producers in the South. Increased production of “their” principal crops will put downward pressure on prices. For example, additional soybeans on “flex” acres in the Corn Belt would depress the price of soybeans for all producers with the effect more noticeable in the South where producers have fewer alternative crops.

Because of the lateness of passage of the bill there is a special provision for wheat producers in 1991. Winter wheat producers had already planted their wheat before program provisions were known. Consequently, wheat producers were given two options. They must choose one to be in compliance with the program for 1991. In either case, they must comply with the 15 percent Acreage Reduction Program (ARP) requirement. In addition, they can choose to either receive deficiency payments on all their planted acres by using a 12-month average price for wheat, or at the 5-month average price on their base acreage which is reduced by the triple base factor of 15 percent.

Acreage Reduction Programs: For 1991, the ARP for wheat is 15 percent; for corn it is 7.5 percent. In 1992-1995, the maximum ARP for wheat and feed grains is 20 percent with the actual rate to be determined each year by the Secretary.

To illustrate how the triple base and ARP reductions work, consider the following example. Assume a producer has 100 corn base acres. Fifteen percent or 15 acres are considered the triple base. Those acres are not eligible for deficiency payments but production on those acres is eligible for price support loans. Next, subtract 7.5 acres for ARP in 1991. As in the past, no crops for harvest can be grown on the ARP acres. Corn can be grown on the remaining 77.5 acres and be eligible for deficiency payments and price support loans. The producer has an additional option of reducing corn planting to 67.5 acres with planting on the other 10 acres subject to the same rules as apply to the 15 percent triple base. The 10 acres would not be eligible for deficiency payments.

Target Prices. Target prices were frozen at $4.00 per bushel for wheat and $2.75 a bushel for corn for the five years of the bill. Deficiency payments will be calculated by using market prices for the first five months of the marketing year for 1991-1993. A 12-month average will be used on all program crops in 1994 and 1995. This latter provision will likely lower deficiency payments in 1994 and 1995 as crop prices usually rise in a seasonal pattern with the 12- month average being higher than the five-month average. In the last 10 years, the 12-month average price for corn has been nine cents higher than the five-month average. For the most recent five years, the 12-month average was seven cents higher than the five-month average. In the last 10 years, the 12-month wheat price has averaged seven cents higher than the 5-month average. In the last five years, the 12-month wheat price has averaged 11 cents higher.

Loan Rates. Wheat and feed grain loans will be calculated at 85 percent of the previous five-year average of farm prices, with high and low years excluded. This is an increase in loan rates from the 1985 Act which based loans on 75 percent of the five-year moving average of prices. However, the Secretary of Agriculture was given authority to reduce loan rates depending on expected carryover stocks. Large stocks could result in as much as a 20 percent reduction in loan rates.

These provisions suggest the following loan rates for corn and wheat for the 1991 crops. Based on the October estimate of prices for the 1990 marketing year, plus the previous four years, and assuming the USDA uses all the discretionary reductions possible in the new Bill, the 1991 loan rate for corn would be $1.63 and $2.07 for wheat. For comparison, 1990 loan rates are $1.57 for corn and $1.95 for wheat.

The loan rate for soybeans was set in the Bill at $5.02, compared to $4.50 for the 1990 crop. The previous bill allowed the Secretary to set the loan rate within limits. A two percent loan origination fee will be charged for oilseed loan program participants under the new Act. In effect, this reduces the net soybean loan rate to $4.92 per bushel. A marketing loan will be available to producers of soybeans for 1991 through 1995. This was an option in the 1985 Act that the Secretary never chose to implement. Under the marketing loan procedure, a producer may take out a loan (net $4.92) and repay it at the prevailing world market price if the world price is below the loan rate. Producers will continue to have the option of forfeiting the crop to the Com­modity Credit Corporation (CCC).

Grain Reserves. The grain reserve program was con­tinued with some changes in entry and release rules. Entry of grain into the reserve must be allowed whenever the 90-day average price falls below 120 percent of the loan rate and when stocks/use ratios equal or exceed 37.5 percent for wheat and 22.5 percent for corn. If only one of these conditions is met, reserve entry is at the Secretary’s discretion.

Restrictions on taking grain out of the Reserve by producers were eliminated. Storage payments will stop whenever the five-day average price exceeds 95 percent of the target price ($2.61 for corn, $3.80 for wheat). Interest accrues only if the five-day average price exceeds 105 percent of the target price.

The CCC may sell its stocks for cash whenever the five-day average price exceeds 150 percent of the loan rate. Release for certificate exchanges may continue at any price level.

The Bill sets a 300 million bushel minimum on the wheat reserves and imposes a 450 maximum. For feed grains, the limits are 600 million bushels minimum and 900 million bushels maximum.

Dairy. A milk price support floor of $10.10 per cwt. is continued through fiscal 1991, but dairy farmers will be assessed five cents per cwt. taken out of milk checks in 1991 and 11 cents for 1992 through August 31, 1995. The assessment can be refunded to a producer who proves his or her milk production has not increased from the previous year’s level.

The law includes an additional incentive not to increase milk production. Price support adjustments will depend on USDA surplus product purchases. If purchases are expected to exceed seven billion pounds, total solids basis, in any calendar year beginning in 1992, USDA may assess producers to cover all costs for purchasing products in excess of the seven-billion-pound trigger level.

Payment Limits. The $50,000 limit on direct and deficiency payments is maintained. A new $75,000 limit is placed on marketing loan gains and so-called Findley payments for a combined total of $125,000. Findley payments make up for the difference between administratively reduced loan rates and the statutory rates.

The maximum payment including commodity loans an individual can receive will be reduced from $500,000 to $250,000. The total does not include payments made under the Conservation Reserve Program, which has separate payment limits. An individual farmer could receive another $125,000 maximum from interest in two other farming entities.

Conservation Programs. Conservation compliance provisions contained in the 1985 Act are continued with minor adjustments. The sodbuster feature — denying program benefits for cropping land that has not been cropped for an extended period of time –is amended by expanding the list of program benefits lost for violations. Graduated sanctions from $500 to $5,000 can be levied against farmers for inadvertent violations. The swamp buster program –denial of benefits for converting wetlands –also will have an expanded list of lost benefits and graduated fines from $750 to $10,000 for inadvertent violations.

Conservation Reserve Program. This program falls under a new program title, the Agricultural Resource Conservation Program (ARCP). The expanded program includes the Conservation Reserve Program (CRP), Wetlands Reserve Program (WRP) and Water Quality Incentive Program (WQIP) to idle up to 50 million acres of the most environmentally sensitive agricultural land. CRP enrollment cannot be less than 40 million acres or more than 45 million acres by 1995. The 1985 Act authorized the CRP to contain a minimum of 40 million acres with authority to increase it to 45 million acres. To date, 34 million acres have been contracted for inclusion in the reserve. Budgetary con­siderations limited expansion beyond that size.

The WRP establishes a voluntary program for one million wetland acres to be placed under paid 30-year or longer easements. The WQIP establishes a new 10-million-acre, five-year program for farmers to protect water quality. Farmers with approved plans may receive up to $3,500 per year in cost share assistance.

Pesticide Record Keeping. Certified pesticide applicators, including farmers, will be required to maintain records of their use of restricted pesticides. Records must be maintained for two years and may be requested by federal and state agencies, as well as by health officials. Individual farm confidentiality, except for the prescribed releases, is to be maintained. Some farmers may consider this an unneces­sary burden and an intrusion on privacy. However, many good managers have been keeping these types of records for their own use for several years.

Food Aid and Export Promotion. Foreign Food Aid programs have been in operation in some form since 1954. Some program changes are made in each farm bill. The 1990 Act gives primary authority over Title I, concessional sales, to the USDA. Concessional sales generally involve interest rate subsidies to the buyers. The Agency for International Development (AID) is given authority for Titles II and ill grant aid programs. Grant aid programs are generally out­right donations of commodities through relief agencies. This represents some of the most sweeping changes in lines of government agency authority since the food aid programs were started in 1954.

Export Enhancement Programs (EEP). Current GATT trade negotiations are focused on restrictions on the use of export subsidy programs. The U.S. has proposed a multi­lateral phasing out of such programs. Recently, the U.S. stance has been to favor a 90 percent reduction in 10 years. Given the uncertainty over the outcome of the negotiations, authority for the EEP has been retained in the 1990 Act. EEP would be funded at not less than $500 million annually, with a goal of 25 percent of EEP funds to be used for the export of high-value products.

The export credit guarantee programs, GSM-102 and GSM-103, are authorized. The GSM-102 program is a program which guarantees short-term credit extended by private lenders to foreign buyers. The GSM-103 program guarantees longer-term credit. USDA is directed to guarantee loans to finance only U.S. farm commodities under the GSM-102 with six-to-36-month credit and GSM-103 with three to 10 year credit. At least $5 billion is authorized for GSM-102, and $500 million annually for GSM-103.

FmHA Direct Loans. As part of the budget reduction program, Farmers Home Administration direct loans would be progressively scaled down. Direct loans would be reduced from $700 million this fiscal year to $600 million in fiscal 1992, $500 million in 1993, and $450 million in fis­cal 1994 and 1995. FmHA may buy-down the interest rate by as much as four percent on some guaranteed loans.

Crop Insurance. Crop insurance became a controversial issue as the farm bill was developed. At one point, it ap­peared that it would be phased out. The administration wanted to phase it out and replace it with a permanent disaster program. This was a reversal of the position taken by the USDA in the early 1980s. The 1990 Act provides for continuation of the current program for the 1991 crop year in which insurance is provided by private firms with the federal government subsidizing up to 30 percent of the cost of the insurance. It is assumed that Congress will resume ef­forts next year to reform the program to make it more self-supporting.

Domestic Nutrition Program. The Act reauthorizes the Food Stamp Program for five years, simplifies some program rules and institutes additional penalties for fraud and misuse of coupons.

The Temporary Emergency Food Assistance Program (TEFAP) survived after having been proposed for elimination. In fact, funding was increased from $120 million to $220 million per year. About 15 million people a month receive TEFAP commodities such as wheat, corn, butter, peanut butter and canned meats while they await approval for food stamps. These commodities also go to many elderly and rural residents who never apply for food stamps.

Results of a recently released study of the special nutri­tion program for low-income women, infants and children (WIC) have been cited as contributing to increased funding for nutrition programs in fiscal 1991. Looking at program cost effectiveness, the study found that “For every dollar spent on the prenatal WIC program, the associated savings in Medicaid costs during the first 60 days after birth ranged from $1.77 to $3.13.”

Rural Development. A new Rural Development Administration (RDA) within USDA is authorized which would dispense money as well as encouragement and technical assistance to rural communities. The RDA would take over some of the responsibilities formerly held by the Farmers Home Administration. These include handling water, sewer, other community facilities and business and industrial loans and grant programs. FmHA would continue farm lending programs.

A Rural Development Pilot Program is established. Under this program, state panels would set priorities for ap­plications for federal financing of rural development projects. A revolving rural development loan program is authorized and will be partly funded by federal contributions. The loan fund would be set up by states with private lender participation.

The Bill provides for linking rural schools, hospitals, and clinics to urban institutions so that students or rural medical technicians may receive instruction by TV.

Commodity Promotion Program. Producers of certain crops will be assessed to support research and promotion programs. Assessments are authorized for soybeans, pecans, mushrooms and limes. The program for soybeans will affect Indiana soybean producers. The nationwide soybean check­off would operate for 18 to 36 months before any referendum would be held. The national check-off of one-half percent of value or about three cents per bushel is expected to raise $60 million a year. During the initial mandatory check-off period, producers may request a refund of their contributions. After the trial period, growers will be polled to determine whether they want a referendum to determine whether refunds should be permitted in the future.

Research and Extension. Funding for agricultural research and extension under a competitive grant system is authorized to expand from $70 million to $500 million a year. The increase is subject to annual appropriations and is in response to recommendations made by a National Academy of Science panel.

Research and extension activities would be expanded to encourage environmentally sound farm production practices, focusing on sustainable agriculture. The authorization includes $40 million for low-input research, $20 million for integrated resource management and $20 million to train and educate producers.

Conclusions

Details on the 1990 commodity programs are yet to be released. When details are available, producers will need to evaluate participation in the programs for 1991. One thing is clear: program payments will decline over the next five years. Deficiency payments will not be made on the 15 percent of base acres which may be planted to alternative crops and by 1994 deficiency payment calculations will be based on the average price over the marketing year rather than the first five months of that year.

Given current wheat prices and prospects for prices in 1991, those who plant wheat will have stronger economic incentives to participate in the wheat program than those who plant com and need to decide on participation in the com program. Some farmers are likely to plant soybeans on their triple base acres.

The outcome of current trade negotiations remains uncertain. Observers note the stiffening resistance in the European Community towards the reduction or removal of export subsidies, especially by the Germans. If no reduction is obtained, the United States may counter with increased use of the Export Enhancement Program. If an agreement is reached to reduce large export subsidies and internal price supports, changes in U.S. price support legislation in 1991 would probably be required. Because of the importance of exports to U.S. agriculture, farmers and other participants in the agricultural sector need to continually monitor the changing trade environment.