[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)                                            
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                                                                            Estimate                            
            Function 350                1996   -----------------------------------------------------------------
                                       Actual      1997       1998       1999       2000       2001       2002  
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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, 

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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 

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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-

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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.