Farm Programs: Observations on Market Loss Assistance Payments
(Correspondence, 06/30/2000, GAO/RCED-00-177R).

Pursuant to a congressional request, GAO provided information on the
financial assistance to farmers called Market Loss Assistance (MLA),
focusing on how MLA payments would have changed if they had been based
on current-year planting information instead of the current funding
formula.

GAO noted that: (1) if MLA payments had been based on current-year
planting information instead of historical data, some farmers would have
received less assistance while others would have received more; (2) in
1999, about 27 percent of the $4.5 billion in ad hoc MLA payments
included in GAO's analysis went to farms that would not have received
this assistance if the payments had been based on current-year
plantings; (3) specifically, about 893,000 farms received about $1.22
billion more than they would have received had the payments been based
on the type or amount of crops planted during 1999; (4) conversely, some
farmers adversely affected by price losses received less in MLA payments
than they would have received had the payments been based on
current-year planting, rather than historical information; (5) for
example, in 1999, about 400,000 farms adversely affected by falling
prices would have received about an additional $300 million in MLA
payments if the payments had been based on that year's plantings; (6)
basing MLA payments on acres planted in the current year rather than on
historical information would better target payments to those farmers
affected by declining prices; (7) however, because this approach would
more directly link the types and quantities of crops actually grown with
government payments, it may create incentives that run counter to the
philosophy underlying the 1996 Farm Bill, namely, encouraging farmers to
base their planting decisions on market signals rather than on
government payment levels; and (8) Congress will have an opportunity to
examine policy options to address this dilemma during the upcoming
deliberations on the next Farm Bill.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-00-177R
     TITLE:  Farm Programs: Observations on Market Loss Assistance
	     Payments
      DATE:  06/30/2000
   SUBJECT:  Agricultural industry
	     Farm produce
	     Agricultural programs
	     Financial analysis
	     Payments
	     Data collection
	     Losses
	     Prices and pricing
IDENTIFIER:  USDA Market Loss Assistance Program
	     USDA Supplementary Income Assistance Program

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GAO/RCED-00-177R 

Market Loss Assistance Payments

United States General Accounting Office Washington, DC 20548

Resources, Community, and Economic Development Division

B- 285418 

June 30, 2000 

The Honorable Dan Glickman The Secretary of
Agriculture

Subject: Farm Programs: Observations on Market Loss Assistance Payments Dear
Mr. Secretary: Since October 1998, the Congress has authorized about $13.8
billion in ad hoc financial assistance to help farmers deal with losses due
to drops in crop prices- about $2.8 billion in 1998 and $5.5 billion in both
1999 and 2000. This assistance- called Market Loss Assistance (MLA)-- was
targeted to growers of the seven crops that have traditionally been
supported by farm programs. 1 To expedite the delivery of this assistance
and to avoid influencing farmers' planting decisions, the payments were
distributed to farmers on the basis of the same formula used for
distributing production flexibility contract payments under the 1996 Farm
Bill- scheduled to expire in 2002. In essence, this formula distributed MLA
payments to individual farmers on the basis of the type and amount of crops
planted (or that were otherwise considered as planted under farm programs
that limited acreage in order to maintain farm prices) from the 1980s
through 1995.

Because many farmers have changed their production patterns over the past
two decades, you and others have raised concerns about whether the resultant
MLA payments were distributed to those who have been most adversely affected
by recent price declines. However, it was not known precisely how payments
would have differed if they had been based on current- year planting
information rather than historical data. To help address this information
gap, we calculated how MLA payments would have changed if they had been
based on current- year planting information instead of the current funding
formula. We did not, however, assess the extent to which MLA recipients
faced economic hardships due to declining crop prices. We performed this
analysis by recalculating MLA payments using the most current planting
information rather than historical data. Planting data for 1999 were
available for most (over 80 percent) of the MLA payment recipients
(representing about $4.5 of the $5.5 billion in total payments) because of
reporting requirements

1 The seven program crops are corn, wheat, oats, barley, grain sorghum,
cotton, and rice.

B- 285418

GAO/ RCED- 00- 177R 

Market Loss Assistance Payments 2 associated with their
participation in other farm assistance programs. 2

Results in Brief

If MLA payments had been based on current- year planting information instead
of historical data, some farmers would have received less assistance while
others would have received more. In 1999, about 27 percent of the $4.5
billion in ad hoc MLA payments included in our analyses went to farms that
would not have received this assistance if the payments had been based on
current- year plantings. Specifically, about 893,000 farms received about
$1.22 billion more than they would have received had the payments been based
on the type or amount of crops planted during 1999. Conversely, some farmers
adversely affected by price losses received less in MLA payments than they
would have received had the payments been based on currentyear planting,
rather than historical, information. For example, in 1999, about 400,000
farms adversely affected by falling prices would have received about an
additional $300 million in MLA payments if the payments had been based on
that year's plantings.

Basing MLA payments on acres planted in the current year rather than on
historical information would better target payments to those farmers
affected by declining prices. However, because this approach would more
directly link the types and quantities of crops actually grown with
government payments, it may create incentives that run counter to the
philosophy underlying the 1996 Farm Bill, namely, encouraging farmers to
base their planting decisions on market signals rather than on government
payment levels. The Congress will have an opportunity to examine policy
options to address this dilemma during the upcoming deliberations on the
next Farm Bill.

Background

In enacting the 1996 Farm Bill, the Congress suspended key provisions of
key, longstanding income support programs so that farmers' planting
decisions would be based more on market signals than on government payment
levels. To help ease the change to a more market- oriented system, the bill
provided farmers with 7 years of declining Agricultural Market Transition
Act (AMTA) payments that were based on the crops recipients planted (or were
otherwise considered as planted in accordance with congressional
legislation) from the early 1980s to 1995. Between 1996 and 2002, AMTA
payments are expected to total about $35.6 billion.

In 1998, the prices of many crops declined significantly, and these declines
have continued to the present. For example, the average price of corn fell
from $3.24 per bushel in 1996 to $2.43 in 1998 and further declined to $1.80
per bushel in 2000. In the face of such price declines, in 1998 and 1999,
the Congress provided emergency MLA

2 Although USDA has current planting data for about 90 percent of the MLA
recipients, our analysis is based on about 83 percent, or $4.5 billion of
the $5.5 billion in 1999 MLA payments, or 1, 556,749 of the 1, 715, 044
farms that received payments. Our methodology is explained in greater detail
later in this report.

B- 285418

GAO/ RCED- 00- 177R Market Loss Assistance Payments 3 payments. These
payments were based on a very simple formula: For example, in

1999, for each dollar farmers received in AMTA payments, they would also
receive a dollar in MLA payments.

Although some in the Congress and the administration acknowledged that this
reliance on historical information was not an ideal targeting mechanism, two
aspects of this mechanism were believed to outweigh this drawback. Because
the payments would be based on a simple funding mechanism that used historic
information rather than current crop production, the payments could be made
quickly. Furthermore, for the same reason, the mechanism was believed to
minimize the potential that farmers' planting decisions would be influenced
by federal payments instead of market signals. Other, alternative, long-
term remedies have been proposed that would eliminate the need for ad hoc
assistance altogether. For example, the administration favors replacing the
MLA program with its proposed Supplementary Income Assistance Program, which
would provide assistance to farmers when their projected gross income for
crops fell below 92 percent of the preceding 5- year average.

MLA payments totaled about $2.8 billion in 1998 and $5.5 billion in 1999.
Because crop prices are expected to remain low in the near future, the
Congress authorized another $5.5 billion for MLA payments later this year.

Basing Payments on 1999 Plantings Would Have Reduced Assistance to Many
Farmers

We estimate that about 893,000 farms received over $1.2 billion more in 1999
MLA payments than they would have received if the payments had been
calculated using information on that year's plantings, rather than on
historical information. While these payment differences ranged from $1 to
over $600,000, nearly half were in the range of $1,001 to $5,000. Figure 1
shows the distribution of and the number of farms receiving these payments.

B- 285418

GAO/ RCED- 00- 177R Market Loss Assistance Payments 4

Figure 1: 1999 MLA Payments for Crops Not Grown

1% ($ 6,125)

$1- 100 (141,000 farms)

16% ($ 198,585) $101- 1,000 (448,000 farms)

45% ($ 549,395) $1,001- 5,000 (261,000 farms)

17% ($ 204,194)

$5,000- 10,000 (30,000 farms)

22% ($ 262,493)

Over $10,000 (13,000 farms)

Dollars in thousands

Of the 893,000 farms receiving payments above what they would have received
had the payments been calculated on 1999 plantings, about 340,000 had not
planted any of

B- 285418

GAO/ RCED- 00- 177R Market Loss Assistance Payments 5 the crop on which
their payments were based. These payments totaled about $380

million and ranged from $1 to over $178,000; about half of these payments
were in the $1,001 to $5,000 range.

Enclosure 1 provides information on the 1998 MLA payments for crops not
grown. These payments totaled about $576 million.

Basing Payments on 1999 Plantings Would Have Benefited Many Farmers

While over $1.2 billion in MLA payments were made to nearly 900,000 farms in
1999 for crops not grown, nearly 400,000 farms could have received about an
additional $300 million if the payments had been based on 1999 rather than
on historical plantings. While these “underpayments” ranged from
less than $1 to over $400,000, as shown in figure 2, 40 percent of these
underpayments were in the $1,001 to $5,000 range.

Figure 2: MLA Underpayments for 1999

1% ($ 4,098)

$1- 100 (100,000 farms)

27% ($ 88,821) $101- 1,000 (220,000 farms)

40% ($ 132,032) $1,001- 5,000 (69,000 farms)

10% ($ 33,302)

$5,000- 10,000 (5,000 farms)

21% ($ 68,077)

Over $10,000 (2,000 farms)

Dollars in thousands

Enclosure 1 contains information on MLA underpayments for 1998, which
totaled about $150 million.

B- 285418

GAO/ RCED- 00- 177R Market Loss Assistance Payments 6

Observations

Given that low crop prices are predicted to continue, MLA assistance may
continue to be used in future years. If so, our analysis quantifies the
previously unknown consequences of using current- year planting information
instead of the historical planting information currently used. However,
basing MLA payments on current- year planting information could influence
farmers' planting decisions, a problem the Farm Bill was intended to
rectify. The dilemma associated with using either historical or current-
year planting information to distribute MLA payments underscores the need to
have farm policies that minimize reliance on ad hoc assistance. The Congress
will have an opportunity to examine policy options that might better avoid
such dilemmas as it begins deliberations over the next farm bill.

Agency Comments

We provided a draft of this report to USDA for review and comment and held
discussions with the Deputy Administrator for Farm Programs and other
officials from the Department's Farm Service Agency, the agency responsible
for administering the MLA program. The agency generally agreed with the
information presented in the report but expressed concern with our
description of the MLA funding mechanism. Specifically, the officials asked
us to clarify that the current MLA funding formula is based both on
historical planting information and on crops otherwise considered as planted
under farm programs that limited acreage in order to maintain crop prices.
We agreed with this comment, as well as several other technical comments and
clarifications suggested by USDA, and made corresponding revisions
throughout the report as appropriate.

Scope and Methodology

To assess the extent to which ad hoc MLA payments would change if they were
based on current- year planting information rather than on historical data,
we obtained and analyzed USDA's data on the MLA payments made during 1998
and 1999. We found that farmers received about $8.3 billion in MLA payments
during these 2 years. However, to ensure the accuracy and reliability of
this information, we matched farms that reported both planted acres and
cropland acres (land generally used for growing crops). We identified about
1.56 million farms in 1999 and about 1.52 million in 1998 that met these
criteria. Of these farms, we examined the data for ones whose planted acres
equaled their cropland acres, plus or minus 20 percent. For 1999, about 1.3
million farms met this criterion. These farms received about $4.53 billion
in MLA payments, or about 83 percent of the total MLA payments for 1999. For
1998, about 1.2 million farms met this criterion. These farms received about
$2.29 billion in MLA payments, or about 81 percent of the total MLA payments
for 1998.

To calculate what these farms would have received had the MLA payments been
based on current- year planting information rather than on historical data,
we substituted current- year planted acres for historical base acres in the
formula used by USDA to calculate AMTA payments. We also verified selected
planting information derived from USDA's database by comparing it with
current planting information in

B- 285418

GAO/ RCED- 00- 177R Market Loss Assistance Payments 7 USDA's county office
files. We did not assess the economic hardships MLA

recipients faced because of declining crop prices for either the seven MLA
program crops or other crops the recipients may have planted.

We performed our analysis from January through May 2000 in accordance with
generally accepted government auditing standards.

----- We will provide copies of this report to congressional committees with
responsibility for appropriations and legislative matters for USDA and to
others on request. Please call me at (202) 512- 5138 if you or your staff
have any questions concerning this report. Key contributors to this report
are listed in enclosure 2.

Sincerely yours, Robert E. Robertson Associate Director, Food

and Agriculture Issues Enclosures – 2

Enclosure I

GAO/ RCED- 00- 177R Market Loss Assistance Payments 8

Information on 1998 MLA Payments

In October 1998, the Congress authorized about $2.8 billion in Market Loss
Assistance (MLA) payments. The following analysis provides information on
how MLA payments would have differed if current- year planting information
had been used instead of historical data. For this analysis, as for our
analysis of 1999 MLA payments, the results were mixed: While most farms
would have received smaller payments, a significant number would have
received larger payments.

Basing Payments on 1998 Plantings Would Have Reduced Assistance to Many
Farmers

In 1998, about 838,000 farms received about $576 million more in MLA
payments than they would have received if the payments had been calculated
using current- year planting information rather than historical data. While
these payments ranged from $1 to over $254,000, almost half were in the
range of $1,001 to $5,000. Figure 3 shows the distribution of and the number
of farms receiving these payments.

Enclosure I

GAO/ RCED- 00- 177R Market Loss Assistance Payments 9

Figure 3: 1998 MLA Payments for Crops Not Grown

2% ($ 9,525)

$1- 100 (226,000 farms)

32% ($ 184,011)

$101- 1,000 (469,000 farms)

43% ($ 249,551)

$1,001- 5,000 (130,000 farms)

11% ($ 62,387)

$5,000- 10,000 (9,000 farms)

12% ($ 70,106)

Over $10,000 (4,000 farms)

Dollars in thousands

Some Farms Would Have Benefited If Payments Had Been Based on Current
Plantings

In 1998, about 393,000 farms would have received about $150 million in
additional MLA payments if the payments had been based on current- year
planting information rather than on historical data. While these
underpayments ranged from $1 to over $250,000, as shown in figure 4, nearly
half were in the $101 to $1,000 range.

Enclosure I

GAO/ RCED- 00- 177R Market Loss Assistance Payments 10

Figure 4: 1998 MLA Underpayments

‚ 4% ($ 6,218)

$1- 100 (158,000 farms)

45% ($ 70,288) $101- 1,000 (206,000 farms) 30% ($ 47,592)

$1,001- 5,000 (27,000 farms)

7% ($ 11,539)

$5,000- 10,000 (1,500 farms)

13% ($ 20,783)

Over $10,000 (500 farms)

Dollars in thousands

Enclosure II

GAO/ RCED- 00- 177R Market Loss Assistance Payments 11

GAO Contacts and Staff Acknowledgments GAO Contacts

Robert E. Robertson, (202) 512- 5138 Gregory A. Kosarin, (202) 512- 5138

Acknowledgments

In addition to those named above, Carl Christian, John Schaefer, Jerry D.
Hall, Don Ficklin, Nancy Bowser, and David A. Rogers made key contributions
to this report.

(150160)

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