    [Budget of the U.S. Government]
    [VI. Investing in the Common Good: The Major Functions of the Federal Government]
    [17. Agriculture]
    [From the U.S. Government Publishing Office, www.gpo.gov]

                                17.  AGRICULTURE

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                                Table 17-1.  FEDERAL RESOURCES IN SUPPORT OF AGRICULTURE
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                Function 350                1996   -----------------------------------------------------------------
                                           Actual      1997       1998       1999       2000       2001       2002
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Discretionary Budget Authority...      4,206      4,140      4,115      4,014      3,944      3,905      3,914
      Mandatory Outlays:
        Existing law...................      5,023      6,132      8,181      7,605      7,156      6,069      5,866
        Proposed legislation...........  .........  .........         17         43         23         10         13
    Credit Activity:
      Direct loan disbursements........      6,183      7,074      8,670      8,573      8,294      7,670      7,159
      Guaranteed loans.................      5,082      7,880      8,075      7,988      7,974      7,970      7,969
    Tax Expenditures:
      Existing law.....................        320        325        330        345        350        355        360
      Proposed legislation.............  .........        -28       -136       -121       -124       -124       -124
    ----------------------------------------------------------------------------------------------------------------

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       Early in our history, the Federal Government helped improve food
    production. Today, it aims to do much more for agriculture and its
    related activities, which account for 16 percent of the Gross Domestic
    Product. The Government helps our bountiful human, natural, and capital
    resources work together to produce the highest possible benefit at the
    lowest cost for Americans and others. Federal programs disseminate
    economic and agronomic information, ensure the integrity of crops and
    safety of meat and poultry, and help farmers face risks from weather and
    unfamiliar export conditions. The results are found in the public
    welfare that Americans enjoy, free of severe dislocations that can occur
    when commodity markets are left to take their natural time to correct
    themselves.
       The Federal Government spends about $10 billion a year for
    agriculture, but the Agriculture Department's (USDA) $50 billion a year
    in other spending includes investments that support farms and farmers'
    income (noted below and in other chapters). The tax code also offers
    $500 million a year in incentives for farmers.

    Conditions on the Farm

       In the 1980s, record-high Federal price supports, global recession,
    and the strong dollar led to steep declines in farm exports, market
    prices, and cropland values, creating the most severe financial crisis
    in the farm sector since the 1930s. The Government responded with the
    largest-ever Federal acreage idling program, more market-oriented and
    lower price supports, and export subsidies to counteract unfair foreign
    trade practices. At the same time, the demand for food increased around
    the world.
       U.S. agriculture has now recovered. In 1995 and 1996, short supplies
    of corn and wheat lifted the sector's economic indicators, and
    agricultural exports hit a record $60 billion in 1996. Market prices for
    major crops such as corn and wheat reached their highest levels in
    recent history; farmer debt-to-asset ratios are low; farm land prices
    are high; and net farm income rose to record levels in 1996, despite the
    cyclical downturn in livestock.
       Exports are key to future farm incomes. The Nation now exports 30
    percent of U.S. farm production, and agriculture produces the greatest
    balance of payments surplus,

    [[Page 160]]

    for its share of national income, of any economic sector. The farm sector generally supported the North American Free Trade Agreement and the recent Uruguay Round of the General Agreement on Tariffs and Trade, believing that U.S. agriculture can compete successfully in a world market free of trade barriers and export subsidy distortions.

    Federal Farm Programs and Markets

       The farm sector can grow when markets send signals to plant crops,
    buy machines, hire workers, and sell food. The historic 1996 Farm Bill
    will greatly increase the market's influence in U.S. farm policy.
       Known officially as the Federal Agriculture Improvement and Reform
    Act of 1996, the Farm Bill will significantly alter the basis for
    planting decisions and Federal income support for most farmers. Under
    previous laws dating to the 1930s, farmers who reduced plantings when
    prices were low could get income support payments. These ``deficiency''
    payments were tied to the gap between market prices and a legislated
    ``target price'' for major commodities, such as wheat, corn, cotton, and
    rice. The program distorted market signals, as farmers planted ``for the
    program.'' The Farm Bill eliminated most planting restrictions. Further,
    the Government will provide fixed, but declining payments to eligible
    farmers for the next seven years, regardless of market prices or
    production. Thus, the law ``decouples'' Federal income support from
    planting decisions and market prices.
       Because commodity prices were high in 1996, the fixed payments
    provided an estimated $3 billion to $4 billion more in income transfers
    than farmers would have received under the old law (see Chart 17-1).
    Payments in 1997 likely will exceed previous law levels by similar
    amounts, but the excess will decline in later years. In signing the Farm
    Bill, the President expressed concern that it did not provide an
    adequate ``safety net'' for farm income. As a result, the budget

    [[Page 161]]

    proposes to strengthen the safety net, largely in partnership with
    private sector approaches.

       The Farm Bill also uses incentives to encourage farmers to protect
    the natural resource base of U.S. agriculture. For example, the new $200
    million-a-year Environmental Quality Incentive Program helps farmers
    address water quality concerns; the new Flood Risk Reduction Program
    provides incentives to move farming operations from frequently-flooded
    land; and the revised Conservation Farm Option gives producers
    incentives to create comprehensive conservation farm plans.
       USDA's conservation programs give technical and financial help to
    farmers and communities. They include the Conservation and Wetlands
    Reserve Programs, which remove land from farm uses; and the Natural
    Resources Conservation Service, which provides technical assistance. For
    more information on conservation, and USDA's investments in forestry and
    public land management, see Chapter 16, Natural Resources and
    Environment. USDA programs also help to maintain vital rural
    communities, as described in Chapter 20, Community and Regional
    Development.

       Risk Management: USDA helps farmers manage their financial risks by
    providing subsidized crop insurance, delivered mainly through the
    private sector. On average, farmers pay no premiums for coverage against
    catastrophic losses, and the Government subsidizes their premiums for
    additional coverage. USDA pays private companies for all costs
    associated with administering Federal crop insurance. Over the past
    three years, an average 80 percent of eligible acres have been insured,
    with losses averaging $1.10 for every $1 in premiums--down from the
    historical average of $1.40. Since the Farm Bill ended USDA's
    traditional price and income support programs, producers now bear the
    added price risk. In 1996, USDA began to pilot-test to farmers, through
    the private sector, several products that mitigate revenue risk, along
    with the traditional coverage for production risk. Initial results
    indicate that farmers generally want these types of products. Crop
    insurance costs the Federal Government about $1.7 billion a year.
       Inspection and Market Regulation: A half-billion dollars a year in
    Federal spending helps secure U.S. cropland from pests and diseases and
    make U.S. crops more marketable. In addition, USDA's Food Safety and
    Inspection Service ensures that U.S. meat and poultry do not threaten
    consumers' health (as described in Chapter 22, Health.) The Animal and
    Plant Health Inspection Service inspects agricultural products that
    enter the country; controls and eradicates diseases and infestations;
    helps control damage to livestock and crops from animals; and monitors
    plant and animal health and welfare. The Agricultural Marketing Service
    and the Grain Inspection, Packers, and Stockyards Administration help to
    market U.S. farm products in domestic and global markets, ensure fair
    trading practices, and promote a competitive and efficient marketplace.
       Economic Research and Statistics: Annual Federal spending of about
    $150 million aims to improve U.S. agricultural competitiveness by
    reporting and analyzing economic information. The Economic Research
    Service provides economic and other social science information and
    analysis for decision-making on agriculture, food, natural resources,
    and rural America. The National Agricultural Statistics Service develops
    estimates of production, supply, price, and other aspects of the farm
    economy. In 1998, it will fund the Census of Agriculture, conducted
    every five years.
       Agricultural Research: The Federal Government plays an important role
    in supporting agricultural research and the enhanced productivity it can
    foster, and spends over $1.5 billion a year for that purpose. The
    Agricultural Research Service is USDA's in-house research agency,
    addressing a broad range of food, farm, and environmental issues. It
    puts a high priority on transferring its research findings to the
    private sector, and in 1998 it expects to submit 70 new patent
    applications, participate in 75 new Cooperative Research and Development
    Agreements, license 25 new products, and develop 70 new plant varieties
    to release to industry for further development and marketing. The
    Cooperative State Research, Education, and Extension Service provides
    grants for agricultural, food, and environmental research; higher
    education; and extension activities. The National Research Ini-

    [[Page 162]]

    tiative competitive research grant program, launched in 1990 on the
    recommendation of the National Research Council, works to improve the
    quality and increase the quantity of USDA's farm, food, and
    environmental research. The average annual return to publicly-funded
    agricultural research exceeds 35 percent, according to recent academic
    estimates.
       Agricultural Credit: USDA provides about $500 million a year in
    direct loans and over $2.5 billion in guaranteed loans for farm
    operating and ownership purposes. Direct loans generally go to beginning
    or socially disadvantaged farmers. Participants must be unable to secure
    credit, and the loans carry interest rates at or below the rates on
    Treasury securities, depending on the farmer's expected income. In
    addition, the Farm Credit System and ``Farmer Mac''--which are
    Government-Sponsored Enterprises--enhance the supply of farm credit
    through ties with national and global credit markets. The Farm Credit
    System (which lends directly to farmers) has recovered strongly from its
    financial problems of the 1980s, in part through Federal help. Farmer
    Mac increases the liquidity of commercial banks and the farm credit
    system by purchasing agricultural loans. In 1996, Congress gave the
    institution authority to pool loans and additional years to attain
    required capital standards.
       Trade: USDA spends over $1 billion a year on export activities,
    including subsidies to U.S. firms facing unfairly-subsidized overseas
    competitors and loan guarantees to foreign buyers of U.S. farm products.
    Much of USDA's export promotion, however, comes through other avenues.
    It helps firms overcome technical requirements, trade laws, and customs
    that often discourage the smaller, less experienced ones from taking
    advantage of export opportunities. Also, it shares some of the risk when
    firms or trade organizations experiment in the export market. USDA helps
    educate firms about the requirements and process of developing an
    overseas market. By participating in the Market Access Program or USDA-
    organized trade shows, firms are better placed to export different
    products to new locations on their own. The programs are working. U.S.
    firms, especially the smaller ones, are exporting more aggressively, and
    high-value products now comprise a growing share of export value.
    Overall, the trade surplus for agriculture in recent decades has grown
    faster than for any other civilian sector of the economy.
       Personnel, Infrastructure, and the Regulatory Burden: USDA
    administers its many farm programs through 2,500 county offices with
    over 17,000 staff. The Farm Bill significantly cut USDA's workload,
    prompting the department to re-examine its staff-intensive field office-
    based infrastructure. In 1997, USDA will launch three efforts: (1)
    conduct a study to find ways to operate more efficiently, (2) undertake
    an Administration initiative to scrap duplicative and unnecessary
    regulations and paperwork, and (3) review and upgrade its computer
    systems to streamline its collection of information from farmers and
    better disseminate information across USDA agencies.

    Tax Incentives

       Farmers can deduct certain costs in the year they incur them, even
    for inventories or for items that provide future benefits and, thus,
    normally would be deducted over time. In addition, solvent farmers do
    not have to recognize the forgiveness of their farm debt as income. And
    farmers can pay lower, capital gains rates on their gains from selling
    certain assets, including unharvested crops. Under Federal estate taxes,
    farmers benefit because their land is valued based on its current use as
    farmland--not its market potential for development--and they can pay
    estate taxes in installments. Finally, feedgrain growers receive
    indirect benefits from the tax subsidy for ethanol production, which
    boosts the market price for corn.