[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.