[Congressional Record Volume 142, Number 138 (Monday, September 30, 1996)]
[Extensions of Remarks]
[Pages E1848-E1849]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




    THE PRODUCTION FLEXIBILITY CONTRACT IN THE AGRICULTURAL MARKET 
TRANSITION (FREEDOM TO FARM) ACT IS A BINDING GUARANTEE ON THE PART OF 
                           THE UNITED STATES

                                 ______
                                 

                            HON. PAT ROBERTS

                               of kansas

                    in the house of representatives

                      Saturday, September 28, 1996

  Mr. ROBERTS. Mr. Speaker, as the adjournment of the 104th Congress 
nears adjournment today, it is a proper time to review the changes that 
have been made in farm programs--I refer to it as Freedom To Farm--and 
what farmers and producers can expect, during the 1996 through 2002 
period, in the way of guaranteed fixed--albeit declining--payments on 
their production flexibility contracts with the Federal Government--the 
Commodity Credit Corporation.
  Nearly all U.S. farmers and producers have signed-up for the 
production flexibility contract with the USDA Consolidated Farm Service 
Agency, and from all reports I believe it is widely endorsed by 
farmers, consumers, rural communities, and rural credit providers, and 
many others. It reverses 60 years of over-regulation of farmers and 
producers by the Federal Government and gives them the flexibility to 
apply good financial management practices and good environmental 
management practices on their farms.
  The reason that I make this statement today is to provide some 
legislative history and background for those farmers who have signed a 
contract with the USDA's Commodity Credit Corporation and may be aware 
that President Clinton released a statement on April 4, 1996 when he 
signed the Federal Agriculture Improvement and Reform [FAIR] Act of 
1996 (Public Law 104-127) claiming he planned to submit legislation in 
1997 to amend the FAIR Act.
  I will review the provisions of the enactment of the Freedom to Farm 
Act (Public Law 104-127), its legislative history, and analyze a recent 
and relevant Supreme Court decision that sets forth standards for 
Federal Government liability under similar contracts.
  Title I of the ``Agricultural Market Transition Act'' (Public Law 
104-127, 110 Stat. 896, April 4, 1996) states in section 101(b), as 
noted in pertinent part below, part of the purpose of the Act:

       (b) Purpose.--It is the purposes of this title--
       (1) to authorize the use of binding production flexibility 
     contracts between the United States and agricultural 
     producers to support farming certainty and flexibility while 
     ensuring continued compliance with farm conservation and 
     wetland protection requirements;.

  The conference report (H. Rept. 104-494, dated March 25, 1996) 
explains the origin of the language in section 101(b) quoted above and 
adoption of the House provision by the conferees:


                  subtitle A--purpose and DEFINITIONS

       (2) Purpose
       The House bill states that it is the purpose of this title 
     to authorize the use of binding production flexibility 
     contracts between the United States and producers; to make 
     nonrecourse marketing assistance loans; to improve the 
     operation of the peanut and sugar programs and; to terminate 
     price support authority under the Agricultural Act of 1949. 
     (Section 101).
       The Senate amendment has no comparable provision.
       The Conference substitute adopts the House provision with 
     an amendment deleting the reference to the Agriculture Act of 
     1949 and adding a reference to the establishment of the 
     Commission on 21st Century Production Agriculture. (Section 
     101).

  When the farm bill--later to become Public Law 104-127--was debated 
on the House floor an inquiry was made about the contractual aspects of 
production flexibility contract. (See Congressional Record, February 
29, 1996, H. 1539):

       Let me first say that it is clearly the intent of Congress 
     that the market transition payment provided by the 7-year 
     production flexibility contract is an express and 
     unmistakable contract between the United States and the owner 
     and operator of farmland. Because the market transition 
     payment is based on the 7-year contract it is the intent of 
     the legislation that the payment is guaranteed.

  When the conference report was taken up on the House floor, the 
production flexibility contract was explained as follows (Congressional 
Record, p. H3141, March 28, 1996):

       The guarantee of a fixed (albeit declining) payment for 
     seven years will provide the predictability that farmers have 
     wanted and provide certainty to creditors as a basis for 
     lending. The current situation in wheat, corn and cotton 
     under which prices are very high, but large numbers of 
     producers have lost their crops to weather or pests would be 
     corrected by FFA. Those producers last year could not access 
     the high prices without crops, and instead of getting help 
     when they need it most, the old system cuts off their 
     deficiency payments and even demands that they repay advance 
     deficiency payments. FFA insures that whatever government 
     financial assistance is available will be delivered, 
     regardless of the circumstances, because the producer signs a 
     binding contract with the Federal Government for the next 
     seven years.

  The debate on Title I of the conference report on the FAIR bill in 
the House and in the Senate is replete with references to ``contract'', 
``guarantee'', ``binding contract'' and similar references. The 
production flexibility contract (USDA--CCC Form 478) speaks in terms of 
contract acreage, contract crop, and the ability of CCC representatives 
to enter onto the producer's farm to determine ``compliance with the 
contract''.
  The fact that the production flexibility contracts were intended to 
carry with them a guarantee of payments barring failure of the producer 
to comply with certain statutorily impress conditions for compliance is 
clearly illustrated. Given that, it should follow that these production 
flexibility contracts represent vested legal rights in owners or 
producers that could be altered by subsequent enactment, except that 
those legal rights could be enforceable against the Government for 
damages if for some reason funding were not made available during the 
7-year period of the contract contemplated in the AMT Act.
  The ruling of the Supreme Court in the case of United States Winstar 
et al, 116 S. Ct. 2432 (1996) should serve as a precedent and should 
apply in the event there is an amendment to the Agricultural Market 
Transition Act prior to 2002 that could have the effect of breaching 
the contractual obligations of the Government to fulfill the provisions 
of the production flexibility contract.
  The Winstar case held that Federal bank regulations that implemented 
the 1989 Financial Institutions Reform, Recovery and Enforcement Act 
(FIRREA) (Public Law 101-73, see particularly 12 U.S.C. 1464(t)) 
imposed new capital requirements on savings and loan associations in 
derogation of promises made in pre-1989 agreements that allowed 
financial institutions willing to take over failing institutions to use 
certain accounting devices to satisfy capital requirements and this 
constituted a breach of contract for which the Government was liable in 
damages.
  The United States in the Winstar case raised the ``unmistakability 
defense'' to the effect that a ``public or general'' sovereign act such 
as FIRREA's alteration of capital reserve requirements (that reversed 
the earlier permission of certain savings and loan institutions to use 
certain accounting devices) could not trigger contractual liability for 
the Government.
  However, the unmistakability defense or doctrine states that 
``sovereign power, even when unexercised, is an enduring presence that 
governs all contracts subject to the sovereign's jurisdiction, and will 
remain intact unless surrendered in unmistakable terms.'' Merrion v. 
Jicarilla Apache Tribe, 455 U.S. 130, 148 (1982). The application of 
this doctrine turns on whether enforcement of the contractual 
obligation alleged would block the exercise of a sovereign power of the 
Government. U.S. versus Winstar Corp., supra.
  As opposed to attempts to bind Congress from enacting regulatory 
measures inconsistent with the contracts, the contracts in Winstar 
allocate or shift the risks incurred by the parties. The plaintiff 
Winstar did not assert that the Government could not change the 
capitalization requirements applicable to the plaintiff, but that the 
Government assumed the risk that where subsequent changes prevented the 
plaintiff from performing under the agreement that the Government would 
be held liable for financial damages. So long as such contract is 
reasonably construed to include a risk-shifting component that may be 
enforced without effectively barring the exercise of that power, the 
enforcement of the risk allocation raises nothing for the 
unmistakability doctrine to guard against, and there is no reason to 
apply it. United States versus Winstar, supra.
  Under the Production Flexibility Contract, risks are allocated the 
parties. As opposed to prior farm programs, the producers agree to 
accept the risk of fixed payments unrelated to national supply or 
established target prices in exchange for the Government's acceptance 
of the risk of less control over supplies of various types of 
agricultural commodities. As in Winstar, the issue does not turn on 
whether the Government can subsequently change the rules under which 
producers operate if they elect to participate in a program, the issue 
is whether enforcing the risks shifted among the parties will infringe 
upon the sovereign jurisdiction of the United States. Where changes in 
the Production Flexibility Contract by the Government result in a 
financial liability to the producer, the Government is liable to the 
producer for a breach of contract and damages.

[[Page E1849]]

This liability does not infringe on the Government's sovereignty and 
does not violate the unmistakability doctrine.
  The Government in Winstar, supra, also asserted that under the 
sovereign acts doctrine, ``whatever acts the government may do, be they 
legislative or executive, so long as they be public and general, cannot 
be deemed specially to alter, modify, obstruct or violate the 
particular contracts into which it enters with private persons.'' The 
Court in the Winstar case held that the sovereign acts doctrine:

       * * * balances the Government's need for freedom to 
     legislate with its obligation to honor its contracts by 
     asking whether the sovereign act is properly attributable to 
     the Government as contractor. If the answer is no, the 
     Government's defense to liability depends on the answer to 
     the further question, whether that act would otherwise 
     release the Government from liability under ordinary 
     principles of contract law.

  In answering the first question, the Court looked at whether the 
action by the Government having an impact on the public contract was 
merely incidental to the accomplishment of a broader government 
objective. The greater the Government's self-interest, the more suspect 
the claim that the private contractor bear the financial burden of the 
Government's action. In Winstar, the Court found that a substantial 
purpose of the Government's action was to eliminate the very accounting 
formula that the acquiring thrifts had been promised. Thus, the 
Government's self-interest was so substantial that the statute was not 
``public and general'' act for purposes of the sovereign acts defense.
  Any changes to the statutory authority for Production Flexibility 
Contracts would no doubt follow the same analysis as that relied upon 
by the Court in Winstar. To the extent that the farm programs would be 
altered, it would be likely that the Government would have substantial 
self-interest in any relief it might obtain from risks allocated it 
under the contract. Most likely this would result in some legislative 
change to reduce the amount of money paid to producers. While such 
change would likely be for the ``public and general'' benefit, it would 
undercut the allocation of risks between the parties to the contract 
and as such, would substantially be in the Government's self-interest.
  Finally, the Government in Winstar asserted the defense of 
impossibility. To invoke the defense of impossibility, the Government 
would have to show that the nonoccurrence of regulatory amendment was a 
basis assumption of the contracts. That is the parties assumed that the 
statute on capitalization requirements would not change. As the Court 
notes, a change was both foreseeable and likely in that case.
  The Production Flexibility Contract states in the Appendix to Form 
CCC-478 (the Production Flexibility Contract) that if the statute on 
which the contract is based is materially changed during the period of 
the contract, CCC may require the producer to elect between 
modification of the contract consistent with the new provisions and 
termination of the contract. This statement itself is an 
acknowledgement that the Congress very well may change the Agriculture 
Market Transition Act prior to its expiration in 2002. Further, if 
Congress changes the program, it is reasonable and expected that the 
contracts would be modified accordingly. However, as was true with the 
plaintiff in Winstar case, producers have no desire to assert that 
Congress cannot change the underlying statute, but instead, may pursue 
a claim for breach of contract and damages where any legislative change 
results in changes to the contract and producers incur financial 
damages. The acknowledgment of possible legislative change to the 
Production Flexibility Contract should only serve to weaken any future 
Government defense of impossibility.

                          ____________________