U.S. Department of Agriculture: Marketing Assistance Loan Program Should
Better Reflect Market Conditions (Letter Report, 11/23/1999,
GAO/RCED-00-9).
Pursuant to a congressional request, GAO reviewed the effects of the
marketing assistance loan program on cash payments to farm producers,
focusing on: (1) which producers received cash payments through the
program, by type of crop and state; (2) why some producers did not
participate in the program; and (3) what types of concerns have been
raised about the program's effect on cash payments and potential
forfeitures.
GAO noted that: (1) as of September 1999, $3.4 billion of the $3.7
billion in cash payments went to producers of four crops: (a) corn; (b)
soybeans; (c) wheat; and (d) upland cotton; (2) the top 10 states in
which producers received this assistance were Illinois, Indiana, Iowa,
Kansas, Minnesota, Nebraska, North Dakota, Ohio, South Dakota, and
Texas; (3) some producers of eligible crops did not participate in the
marketing assistance loan program in 1998 and could not receive a loan
deficiency payment because: (a) the posted county price for their crop
equaled or was higher than the applicable loan rate; (b) they had sold
their crop before requesting a loan deficiency payment and therefore
were no longer eligible for a payment; or (c) they had produced crops,
such as rye, that were not covered by the program; (4) as the use of the
marketing assistance loan program increased, producers and Department of
Agriculture (USDA) officials raised a number of concerns about: (a)
inconsistencies in the cash payments available to some producers but not
to others; and (b) the heightened potential for loan forfeitures; (5)
they pointed out that because the rates for loan deficiency payments
have been consistently higher in some counties than in nearby or
adjoining counties, the program's design has created an incentive for
producers to move their grain from one county to another to receive a
higher payment; (6) because of the way USDA established its loan rates
and posted county prices, producers of classes of wheat that have higher
market prices have received, or are likely to receive, lower rates for
loan deficiency payments than producers of classes of wheat that have
lower market prices; (7) on the other hand, producers of lower-priced
classes of wheat have been able to receive higher rates for loan
deficiency payments; (8) because the national loan rates for some crops,
such as soybeans, were set at levels that cover significantly more of
production costs than the national loan rates for other crops, an
incentive has been created to plant crops in response to government
payments rather than to market demand; (9) the program had a cash
payment limitation of $75,000; (10) USDA officials told GAO they were
concerned that producers would use the program's loan component to
obtain financing and would forfeit their collateral to the government
once they reach the payment limitation; (11) the Secretary of
Agriculture has not yet made the changes he could make to the program
because of concerns about decreases in some producers' income during a
period of low crop prices; and (12) other possible changes to the
program's design would require legislation.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-00-9
TITLE: U.S. Department of Agriculture: Marketing Assistance Loan
Program Should Better Reflect Market Conditions
DATE: 11/23/1999
SUBJECT: Agricultural programs
Agricultural products
Loan repayments
Farm income stabilization programs
Loan defaults
Eligibility criteria
Prices and pricing
IDENTIFIER: USDA Marketing Assistance Loan Program
Illinois
Indiana
Iowa
Kansas
Minnesota
Nebraska
North Dakota
Ohio
South Dakota
Texas
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Subcommittee on Forestry,
Conservation, and Rural Revitalization, Committee on Agriculture,
Nutrition, and Forestry, U.S. Senate
November 1999
U.S. DEPARTMENT OF AGRICULTURE -
MARKETING ASSISTANCE LOAN PROGRAM
SHOULD BETTER REFLECT MARKET
CONDITIONS
GAO/RCED-00-9
Marketing Assistance Loan Program
(150095)
Abbreviations
=============================================================== ABBREV
USDA -
Letter
=============================================================== LETTER
B-283795
November 23, 1999
The Honorable Kent Conrad
Ranking Minority Member
Subcommittee on Forestry, Conservation,
and Rural Revitalization
Committee on Agriculture, Nutrition, and Forestry
United States Senate
Dear Senator Conrad:
The marketing assistance loan program is designed to provide
producers of certain crops with interim financial assistance at
harvest, when prices are usually lower than at other times of the
year. By doing so, the program effectively guarantees a minimum
price for those crops. For 1998 crops, the program provided $6.7
billion in loans. It also provided $3.7 billion in cash payments, as
of September 22, 1999, up from $162 million for 1997 crops. This
jump in cash payments occurred because of substantial declines in
crop prices; payments are expected to grow to about $5.9 billion for
1999 crops.
The program is composed of two major componentsloans and loan
deficiency paymentsand is available to producers of certain
crops--wheat, feed grains, oilseeds, upland cotton, and rice. Under
the loan component, producers can obtain a marketing loan after
harvest by using their crop as collateral. The loan amount is based
on a statutory national loan rate ( a per-unit price for each crop)
that is adjusted by the U.S. Department of Agriculture (USDA) to
reflect county variations in market prices across the country. To
determine the loan amount, USDA multiplies the county loan rate by
the amount of crop offered as collateral. Producers can settle a
loan in one of three ways. First, producers can sell their crop and
repay the loan plus interest. Second, if crop prices remain too low
to allow producers to repay the loan plus interest, they can sell the
crop and repay the loan at the posted county pricea USDA estimate of
the local market price (for cotton and rice, USDA uses the adjusted
world price)and keep the difference. This difference is called a
marketing loan gain and is one of two types of cash payments
available through the program. Finally, producers can forfeit their
collateral and keep the loan amount. The program's other
componentthe loan deficiency paymentprovides the other type of cash
payment available under the program. This payment reflects the
difference by which the applicable county loan rate exceeds the
posted county price on the day a producer requests a loan deficiency
payment. If producers choose this component, they receive a cash
payment and can sell their crop whenever they choose. The program
did not allow producers to receive more than $75,000 annually in cash
paymentstotal marketing loan gains and loan deficiency payments.
However, USDA's appropriations act for fiscal year 2000 (P.L.
106-78, Oct. 22, 1999) includes provisions that increased this
payment limitation to $150,000 for 1999 crops only.
The large increase in cash payments in 1998 prompted your concern,
and you asked us to determine (1) which producers received cash
payments through the program, by type of crop and state; (2) why some
producers did not participate in the program; and (3) what types of
concerns have been raised about the program's effect on cash payments
and potential forfeitures.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
As of September 1999, $3.4 billion of the $3.7 billion in cash
payments went to producers of four cropscorn, soybeans, wheat, and
upland cotton. The top 10 states in which producers received this
assistance were Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska,
North Dakota, Ohio, South Dakota, and Texas.
For a number of reasons, some producers of eligible crops did not
participate in the marketing assistance loan program in 1998. These
producers could not receive a loan deficiency payment because (1) the
posted county price for their crop equaled or was higher than the
applicable loan rate; (2) they had sold their crop before requesting
a loan deficiency payment and therefore were no longer eligible for a
payment; or (3) they had produced crops, such as rye, that were not
covered by the program.
As the use of the marketing assistance loan program increased,
producers and USDA officials raised a number of concerns about (1)
inconsistencies in the cash payments available to some producers but
not to others and (2) the heightened potential for loan forfeitures.
First, they pointed out that because the rates for loan deficiency
payments have been consistently higher in some counties than in
nearby or adjoining counties, the program's design has created an
incentive for producers to move their grain from one county to
another to receive a higher payment. Many have done so. Second,
because of the way USDA established its loan rates and posted county
prices, producers of classes of wheat that have higher market prices
have received, or are likely to receive, lower rates for loan
deficiency payments than producers of classes of wheat that have
lower market prices. On the other hand, producers of lower-priced
classes of wheat have been able to receive higher rates for loan
deficiency payments. Third, because the national loan rates for some
crops, such as soybeans, were set at levels that cover significantly
more of production costs than the national loan rates for other
crops, an incentive has been created to plant crops in response to
government payments rather than to market demandwhich was not the
intention of the 1996 Farm Bill's overall goals. Finally, the
program had a cash payment limitation of $75,000. USDA officials
told us they were concerned that producers would use the program's
loan component to obtain financing and would forfeit their collateral
to the government once they reach the payment limitation.\1 USDA has
recognized that some inconsistencies and unintended consequences have
emerged as the program has been implemented. However, the Secretary
of Agriculture has not yet made the changes he could make to the
program because of concerns about decreases in some producers' income
during a period of low crop prices. Other possible changes to the
program's design would require legislation. We are recommending that
the Secretary develop and implement administrative changes and, as
necessary, seek legislative changes from the Congress to address the
issues we identified.
--------------------
\1 As discussed earlier, USDA's appropriation act for fiscal year
2000 provides an interim solution by increasing the payment
limitation to $150,000 for 1999 crops only.
BACKGROUND
------------------------------------------------------------ Letter :2
The Federal Agriculture Improvement and Reform Act of 1996, referred
to as the 1996 Farm Bill, changed the federal government's
long-standing approach to farm supportfrom a policy based on
managing crop production and supporting farm income through a variety
of payment mechanisms and supply restrictions to a policy that allows
producers flexibility in what they plant and provides fixed, but
declining, income support payments through fiscal year 2002. The
1996 Farm Bill retained a commodity loan program, including its
provisions for marketing loan gains and loan deficiency payments.
This program is now known as the marketing assistance loan program.
In 1996, the first year in which the 1996 Farm Bill was in effect,
the marketing assistance loan program served primarily as a source of
interim financing because crop prices were high enough to enable
producers to sell their crops and repay their loans. However, in
1998, when market prices fell below the loan rates, a large number of
producers turned to the marketing assistance loan program as a source
of income.
HOW THE MARKETING ASSISTANCE
LOAN PROGRAM WORKS
---------------------------------------------------------- Letter :2.1
To participate in the marketing assistance loan program, producers
must meet several criteria. They must harvest eligible crops,\2 and
for some crops, must have entered into the 7-year production
flexibility contracts established in the 1996 Farm Bill.\3
Furthermore, producers must own the crop at the time they request
assistance. That is, they must not have relinquished ownership of
the crop by a date that is earlier than the date they requested
assistance. This provision is necessary because, in order to provide
a loan, the government must have the crop as collateral in case the
producer does not repay the loan. The producer's retention of
ownership is known as having a beneficial interest.
--------------------
\2 Barley; corn; upland cotton; grain sorghum; minor oilseeds
(canola, crambe, flaxseed, mustard seed, oil-type sunflower seeds,
other types of sunflower seed, rapeseed, and safflower seed); oats;
rice; soybeans; and wheat.
\3 Under the 1996 Farm Bill, any producer whose farm had a recorded
planting history for wheat, feed grains, upland cotton, and rice in
any single year from 1991 to 1995 could sign a contract that provided
annual payments through 2002, regardless of the crop planted.
THE LOAN PROGRAM
-------------------------------------------------------- Letter :2.1.1
To obtain a marketing assistance loan, a producer pledges the
harvested crop as collateral and receives a loan based on the amount
of the crop offered as collateral multiplied by a loan rate for each
unit of eligible production. These loans provide producers with (1)
financial assistance so they do not have to sell their crop at
harvest, when prices at local grain elevators are usually lower than
at other times of the year, and (2) a guaranteed priceup to the loan
rate, for their production.
Producers can settle their loans in one of three ways. First, they
can repay the loan's principal and interest within the loan period,
usually 9 months, which is what producers generally do if crop prices
are relatively high. Second, producers can forfeit the crop to the
government when the loan matures and keep the loan principal as
payment. This option provides producers with a minimum guaranteed
price for their crops. Finally, producers of wheat, feed grain, and
oilseeds can repay the loan at the posted county price--a USDA
estimate of the local market price--prior to the loan's maturity
date, and sell the crop on the market.\4 With this choice, the
difference between the county loan rate and the posted county
price--known as a marketing loan gainis waived and is considered a
cash payment to the producer. Accrued interest is also waived but is
not considered a cash payment. The Secretary of Agriculture
developed these procedures for marketing loan gains in response to a
congressional mandate to establish alternative rates for loan
repayments to minimize potential loan forfeitures.
--------------------
\4 The 1985 Farm Bill mandated that cotton and rice producers be
allowed to repay their loans at the lesser of principal and interest
or the adjusted world price. The 1990 Farm Bill mandated that
soybean producers be allowed to repay their loans at the lesser of
principal and interest or a price that the Secretary of Agriculture
determined to be the posted county price. Under the mandates of the
Omnibus Budget Reconciliation Act of 1990, wheat and feed grain
producers, beginning in 1993, were allowed to repay their loans at
the lesser of principal and interest or the posted county price.
THE LOAN DEFICIENCY
PAYMENT
-------------------------------------------------------- Letter :2.1.2
In order to reduce the administrative work associated with producers'
obtaining a loan and paying it back on the same day to obtain the
marketing loan gain, statutory provisions mandated that USDA
implement loan deficiency payments in 1985 for upland cotton and
rice; in 1991, for oilseeds; and in 1993, for wheat and feed grains.
The rate for a loan deficiency payment is the amount by which the
applicable county loan rate exceeds the posted county price on the
day the request for payment is made.\5 The rate provides an amount
equal to the rate available for a marketing loan gain on the same
day. When the posted county price is at or above the loan rate, no
loan deficiency payments are available because the intent of the
program is only to guarantee that producers will receive the loan
rate for their crop. While producers who take a loan deficiency
payment do not incur the interest and administrative fees associated
with the loan option, they must assume the financial risk of
decreases in crop prices.
--------------------
\5 Cotton and rice use adjusted world prices. However because most
of this report focuses on wheat, feed grains, and oilseeds, we use
posted county prices throughout the report.
DETERMINING LOAN RATES
---------------------------------------------------------- Letter :2.2
The Secretary of Agriculture adjusts loan rates from a legislatively
set national loan rate for each crop, generally on a county-by-county
basis. The average of the county loan rates weighted for production
for each crop must not exceed the national loan rate. The
legislatively set national loan rates are no higher than 85 percent
of the average market price for each crop for the preceding 5 years,
excluding the high and low years.\6 In addition, the national loan
rates for wheat and corn can be no higher than 1995 levels, and the
national loan rate for soybeans may not exceed $5.26 per bushel.
USDA has not updated many of the county loan rates for wheat and feed
grains in several years. Loan rates vary by location because they
are based on market priceswhich are influenced by factors such as
local supply and demand and transportation. For example, in Iowa,
the county loan rates for corn ranged from $1.72 to $1.91 per bushel,
depending on the county where the loan was obtained. In contrast, in
California, the county loan rates for corn ranged from $2.37 to $2.61
per bushel. Figure 1 shows the variation in the ranges of loan rates
for corn throughout the United States in 1998.
Figure 1: Variations in the
Ranges of Loan Rates for Corn
Nationwide, 1998
(See figure in printed
edition.)
Source: GAO's analysis of USDA's data.
--------------------
\6 For wheat, a weighted average posted county price for all classes
of wheat is calculated on the basis of the percentage distribution of
the acreage of wheat class produced. The upland cotton and rice loan
rate formula differ somewhat.
THE POSTED COUNTY PRICE
SYSTEM
---------------------------------------------------------- Letter :2.3
USDA provides daily and weekly posted county prices in about 3,000
counties for 18 of the crops included in the marketing assistance
loan program. USDA establishes the posted county price for each
county using current prices from several of 19 terminal markets (such
as Kansas City, Missouri), adjusted for local supply and demand
factors and transportation from the county to the terminal. These
terminal markets are used to establish the posted county price, even
though the grain may not actually be shipped to or marketed through
the assigned terminal location. The Department makes adjustments, as
needed, to ensure that posted county prices continue to reflect a
value as close as possible to the local cash market price in any
given area. Posted county prices are based on terminal prices from
the previous marketing day or week.
CASH PAYMENTS PROVIDED TO
PRODUCERS
------------------------------------------------------------ Letter :3
For 1998 crops, most of the $3.7 billion in cash payments
--$3.4 billion--went to producers of four crops: corn, soybeans,
wheat, and upland cotton. Producers of barley and oats, however,
received payments that amounted to a higher percentage of the value
of these crops. The top 10 states in which producers received loan
deficiency payments were Illinois, Indiana, Iowa, Kansas, Minnesota,
Nebraska, North Dakota, Ohio, South Dakota, and Texas. Table 1 shows
cash payments, by crop, for 1998.
Table 1
Cash Payments Provided by the Marketing
Assistance Loan Program, 1998 crops
(Dollars in thousands)
Loan
Marketing deficiency Total cash
Crop loan gain payment payment
---------------------------- ------------ ------------ ------------
Corn $321,206 $998,607 $1,319,812
Soybean 316,399 880,796 1,197,194
Wheat (all classes) 56,572 413,487 470,060
Upland cotton 223,054 254,346 477,400
Barley 3,824 78,429 82,253
Sorghum 3,340 57,017 60,357
Oats 459 19,032 19,491
Sunflower oil 5,178 14,051 19,229
Canola 607 7,474 8,081
Flax 79 1,657 1,736
Rice 11,375 1,007 12,382
Sunflower 25 1 26
Mustard seed 0
Safflower 0
Rapeseed 0
Total $942,118 $2,725,904 $3,668,021
----------------------------------------------------------------------
Source: GAO's analysis of USDA's data, as of Sept. 22, 1999.
Figure 2 shows the percentage of cash payments in relation to the
value of the crop produced. A crop's market value is calculated by
multiplying the annual average market price by the quantity produced.
This figure shows that barley and oat producers received
significantly larger payments in relationship to the value of these
crops than did producers of other crops.
Figure 2: Cash Payments as a
Percentage of the Value of the
Crops Produced in 1998
(See figure in printed
edition.)
Source: GAO's analysis of USDA's data.
Producers in 10 of the major crop-producing states received $1.8
billion, or 66 percent of the loan deficiency payments for crops
harvested in 1998. The top 10 states in which producers received
this assistance were Illinois, Indiana, Iowa, Kansas, Minnesota,
Nebraska, North Dakota, Ohio, South Dakota, and Texas.
REASONS SOME FARMERS DID NOT
PARTICIPATE IN THE PROGRAM
------------------------------------------------------------ Letter :4
Some producers did not participate in the marketing assistance loan
program in 1998 for a number of reasons. The issue of
nonparticipation surfaced in 1998 because this was the first time
that crop prices were low enough to cause large numbers of wheat,
feed grain, and oilseed producers to seek income from the program.
USDA gave several reasons why producers did not participate: (1)
producers of eligible crops could not receive a loan deficiency
payment when the posted county price for the crop equaled or was
higher than the loan rate, (2) some producers had sold their eligible
crop before requesting financial assistance, and (3) producers of
other crops not specified by law as eligible, such as rye, could not
receive assistance.
LOAN DEFICIENCY PAYMENTS
WERE NOT ALWAYS AVAILABLE
---------------------------------------------------------- Letter :4.1
Because the rate for loan deficiency payments is based on the amount
by which the applicable county loan rate exceeds the posted county
price, payments are not available when the posted county price is at
or above the loan rate. Therefore, producers who sought a loan
deficiency payment for their harvested crop during a period when this
condition was occurring could not obtain a payment. For example,
according to USDA officials, no loan deficiency payments were
available to producers of hard red winter wheat in Texas between June
and July 1998. Similarly, for producers of durum wheat in North
Dakota, loan deficiency payments were rarely available because the
posted county price was seldom below the loan rate during 1998.
PRODUCERS WHO HAD SOLD THEIR
CROP BEFORE REQUESTING
ASSISTANCE COULD NOT
PARTICIPATE
---------------------------------------------------------- Letter :4.2
Producers who had sold their crop could not participate in the
program because of its beneficial interest rules. After producers
sell their crop, they no longer have a beneficial interest. Some
producers had not understood the implications of this provision in
1998 when they applied for assistance under the program. As
producers become more familiar with the program's beneficial interest
provision, however, they are likely to find it less of an obstacle to
participation, according to USDA officials.
PROGRAM ASSISTANCE WAS
LIMITED TO PRODUCERS OF
ELIGIBLE CROPS
---------------------------------------------------------- Letter :4.3
Producers of crops other than those specified in the program are
obviously not eligible for benefits. However, one of these crops,
rye, was covered by a commodity loan program before the 1996 Farm
Bill. The 1996 Farm Bill did not include rye as an eligible crop.
USDA has extended coverage to crops for 1999 that it had not allowed
in 1998--hull-less oats and crambe, an industrial oilseed. According
to USDA officials, hull-less oats were not eligible in 1998 because
the crop was not approved as a class of oats under the U.S. Official
Grain Standards Act. However, according to an agricultural extension
service official at North Dakota State University, hull-less oats are
similar to traditional oats, which are included in the program. USDA
decided that because the approval process is under way, the 1999
crops would be eligible. In 1998, crambe was not eligible, but the
Secretary of Agriculture, under his discretionary authority for
oilseeds, made it eligible for 1999.
SUDDEN INCREASE IN PROGRAM
PAYMENTS SURFACED ISSUES
RELATED TO PROGRAM DESIGN
------------------------------------------------------------ Letter :5
The sudden increase in program payments starting in 1998 surfaced a
number of concerns among farmers and program officials about
inconsistencies in the cash payments available to some producers but
not to others and about the increased potential for loan forfeitures.
First, because of the process used to determine the rates for loan
deficiency paymentsin particular, the relationship between the
variables used to determine posted county prices and county loan
ratesthe rates for loan deficiency payments were consistently higher
in some counties than in nearby or adjoining counties. As a result,
some producers moved their grain to a county with higher rates. In
addition, for the most part, USDA has not adjusted county loan rates
for wheat and feed grains in a number of years. Second, USDA has one
loan rate for wheat but five separate posted county pricesone for
each class of wheat. The single loan rate for wheat is a weighted
average of the prices and acreage produced for the five classes of
wheat.\7 However, some classes of wheat, such as durum in 1998, have
higher market prices and less production. As a result of the single
wheat loan rate and the five posted county prices, producers of
classes of wheat that have lower prices (such as soft white wheat in
1998) were able to obtain a higher rate for loan deficiency payments
than producers of classes of wheat that have higher prices. Third,
national loan rates for some crops, such as soybeans, cover a
significantly higher percentage of the production costs than national
loan rates for other crops. As a result, producers have chosen to
plant some crops over others in response to government payments
rather than to market signals. For example, the 1998 national loan
rate for soybeans covered about 250 percent of the variable costs of
production while the loan rate for corn covered about 150 percent of
these costs. Finally, a $75,000 payment limitation was in place for
cash payments. USDA officials told us that because of the $75,000
payment limitation, they were concerned that more producers would use
the loan option in 1999 to obtain financing and forfeit their
collateral to the government once they reached the payment
limitation. Any program-related gains for producers that are
associated with forfeiture are not subject to the payment limitation.
In this regard, USDA's appropriations act for fiscal year 2000
increased the payment limitation to $150,000 for 1999 crops .
--------------------
\7 The five classes of wheat include Durum, Hard Red Spring, Hard Red
Winter, Soft Red Winter, and Soft White.
PRODUCERS SOUGHT HIGHER
PAYMENTS ACROSS COUNTY LINES
---------------------------------------------------------- Letter :5.1
Rates for loan deficiency payments differ significantly across the
nation for producers of the same crop on a given day. That is, the
loan deficiency payment rate, which is the amount the county loan
rate exceeds the posted county price, may be $0.18 per bushel for a
crop in one county and $0.29 per bushel for that same crop in an
adjoining county. According to USDA officials, producers, and grain
elevator operators we spoke with, when the rate for a loan deficiency
payment in a nearby county was higher, producers moved their crop to
that county, ignoring their closer markets and storage facilities.
Figure 3 illustrates the differences in rates for loan deficiency
payments by county for corn on September 28, 1998.
Figure 3: Nationwide Rates for
Loan Deficiency Payments for
Corn, September 28, 1998
(See figure in printed
edition.)
Source: GAO's analysis of
USDA's data.
(See figure in printed
edition.)
According to USDA, many of the differences in rates for loan
deficiency payments have developed because USDA uses posted county
prices (which change daily or weekly) and county loan rates (which
are subject to change annually) in determining these rates. The
differences in these rates are amplified because USDA has not
adjusted most county loan rates for wheat and feed grains to reflect
more recent relationships in market prices.
In addition, according to USDA officials, posted county prices follow
the market by a day or a week, depending on the crop. For 1998, we
found that cash prices in the local market were higher than posted
county prices by a per-bushel average of $0.04 for wheat, $0.04 for
corn, and $0.03 for soybeans. However, posted county prices were
significantly different from local market conditions on occasion
because USDA uses prices from different terminal markets to determine
posted county prices. In these situations, these differences created
incentives for producers to move their crop to areas receiving higher
rates for loan deficiency payments. For example, in September 1998,
the rate for a loan deficiency payment was higher for corn in
Minnesota than in nearby counties in Iowa. A producer who
transported corn to Minnesota would have received $.08 more per
bushel for corn. These particular variances occurred because USDA
used different terminal market prices for corn-producing counties in
Minnesota than it used for corn-producing counties in Iowa to
determine posted county prices.
Although the Secretary of Agriculture has the authority to adjust
county loan rates, USDA has generally not done so since 1995 because
the demand for loans prior to 1998 was low and because, more
recently, it did not want to lower loan rates during the current
period of low crop prices. For example, if USDA had adjusted all the
county loan rates for wheat for 1999 on the basis of current market
prices and production patternswithin the national limits set by the
Congress--the wheat loan rates would have decreased in 1,979 of the
2,857 wheat-producing counties. Figures 4 and 5 show the changes
that would have occurred if the wheat and corn loan rates had been
revised.
Figure 4: Changes in Wheat
Loan Rates If They Had Been
Adjusted
(See figure in printed
edition.)
Source: GAO's analysis of
USDA's data.
(See figure in printed
edition.)
Figure 5: Changes in Corn Loan
Rates If They Had Been Adjusted
(See figure in printed
edition.)
Source: GAO's analysis of
USDA's data.
(See figure in printed
edition.)
In response to the problem of producers' choosing to market their
crops in counties where the rates for loan deficiency payment are
higher, USDA discussed the possibility of an alternative approach.
Under this approach, the Secretary, acting within his authority,
would establish a uniform rate for loan deficiency payments for each
crop on a given day. However, USDA has not formally proposed this
change. There are concerns that some producers would have lower loan
deficiency payments and that government costs could increase.
PRODUCERS OF WHEAT CLASSES
THAT HAVE LOWER PRICES
RECEIVED HIGHER LOAN
DEFICIENCY PAYMENTS
---------------------------------------------------------- Letter :5.2
In using the marketing assistance loan program, producers of wheat
classes that have lower prices could receive higher rates for loan
deficiency payments than producers of wheat classes that have higher
prices within the same county. This is because USDA has one loan
rate for wheat, which is a weighted average of the market prices and
acres produced for the five classes of wheat, but five separate
posted county prices for each class of wheateach with a different
market value. Some classes of wheat have higher market prices and
less production. However, as a result of the single loan rate for
wheat and the five posted county prices, producers of classes of
wheat that have lower prices (such as soft white wheat during 1998)
may have been able to obtain higher rates for loan deficiency
payments than producers of classes of wheat that generally have
higher prices, such as durum. For example, throughout 1998, durum
wheat producers in North Dakota were rarely eligible for loan
deficiency payments because the posted county prices were seldom
below the loan rate. In contrast, producers of other wheat varieties
in North Dakota received an average of $0.28 per bushel in loan
deficiency payments.
In response to this problem, USDA analyzed the impact of using a
separate county loan rate for each of the five classes of wheat.
USDA has not proposed any changes in the loan rates because some
producers' rates would have declined substantially in many counties.
Furthermore, USDA did not want to adjust the wheat loan rates without
adjusting loan rates for other crops as well.
PRODUCERS INCREASED
PRODUCTION OF SOYBEANS
BECAUSE OF USDA'S HIGHER
GUARANTEED PRICE
---------------------------------------------------------- Letter :5.3
As a result of differences in loan rates in relationship to crop
production costs, according to USDA and producers, producers are
choosing to grow crops in response to available payments rather than
in response to market signals. According to USDA officials, soybean
production increased 4 percent in 1999, largely because of the higher
net returns associated with the relatively higher loan rate offered
for this crop. This view is consistent with interviews we held with
producers and county officials.
USDA's loan rates for different crops cover different percentages of
production costs because of differences in the congressionally
mandated limits on the national loan rates. For example, the
national loan rate for soybeans covers significantly more of that
crop's production costs than do the national rates for wheat and feed
grains. Using the national average for variable costs of production
as a yardstick, the national loan rate for soybeans covers about 250
percent of variable costs compared with the national loan rates for
wheat and feed grains, which cover 120 percent to about 150 percent
of variable costs. Figure 6 shows the differences in the variable
costs of production covered by the national loan rates for soybeans;
feed grains (corn, sorghum, oats, barley); wheat; upland cotton; and
rice. As figure 6 shows, none of the other crops has a loan rate
offering as high a level of price-to-cost guarantee as soybeans.
Figure 6 also shows the differences in variable costs of production
that would be covered if the limits on the national loan rates were
not in place. In order to resolve these inconsistencies, legislation
would be necessary. USDA has not proposed any legislation to change
the national loan limits to resolve this problem, but USDA does
support adjusting the national loan rates for wheat and feed grains.
Figure 6: Percentage of
Variable Costs of Production
Covered by the 1998 National
Loan Rates and the Additional
Percentage That Would Have Been
Covered If the 1998 National
Loan Rates Had Not Been Limited
by Legislation
(See figure in printed
edition.)
Source: GAO's analysis of USDA's data.
SOME PRODUCERS REACHED
LIMITS ON CASH PAYMENTS
---------------------------------------------------------- Letter :5.4
According to USDA officials and producers we interviewed, because
prices had declined significantly in 1998, some producers reached the
annual ceiling of $75,000 for cash payments. USDA county office
officials told us that they expect even more producers to meet this
payment limitation during crop year 1999. USDA officials told us
they were concerned that when producers reach the payment limitation,
they will take out loans and forfeit their collateral. Because such
concerns also surfaced in the Congress, the $75,000 payment
limitation was raised to $150,000 for 1999 crops only with the
passage of P.L. 106-78 (Oct. 22, 1999).
CONCLUSIONS
------------------------------------------------------------ Letter :6
Because of the dramatic decrease in crop prices in recent years, many
producers, as would be expected, turned to the marketing assistance
loan program as a source of guaranteed income, rather than as a
source of interim financing at harvestthe program's original,
primary use when market prices for crops are lower and typically
increase above the county loan rate after harvest. As a result, the
program has experienced a huge increase in costa more than
twentyfold increase between 1997 and 1998 crops. During this time, a
number of implementation anomalies and unintended consequences have
emerged from several features of the program's design, such as the
process for setting posted county prices and the lack of adjustments
to the loan rates by the Secretary of Agriculture to reflect more
recent market conditions. These interrelated causes have resulted in
marketing inefficiencies. The Secretary of Agriculture can address
some aspects of the problem with administrative action. Other issues
concerning the program's design can only be addressed through
legislative changes.
RECOMMENDATION TO THE SECRETARY
OF AGRICULTURE
------------------------------------------------------------ Letter :7
To respond to the problems producers have encountered in using the
marketing assistance loan program and to address the increased
potential for loan forfeitures, we recommend that the Secretary of
Agriculture develop and implement administrative changes--or, if
lacking authority to do this, seek legislative changes from the
Congress--to revise the program to provide financing and price
guarantees that better reflect market conditions. These changes
should address the following: (1) the process to establish and
update the national and local loan rates for each crop, (2) the
process to estimate local market prices, (3) the cost to the
government of these changes, and (4) the financial impact these
changes would have on producers in different regions of the country.
AGENCY COMMENTS
------------------------------------------------------------ Letter :8
We provided a copy of a draft of this report to USDA for its review
and comment. We met with officials from USDA's Farm Service Agency,
including the Assistant Deputy Administrator for Farm Programs.
These officials generally agreed with the information provided in our
report and with the report's conclusions and recommendation. The
agency officials provided technical changes to the report, which we
incorporated as appropriate.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :9
To determine which producers benefited from the program, by type of
crop and state, we reviewed USDA's files on marketing assistance
loans and loan deficiency payments. To determine why producers did
not participate in the program, we interviewed USDA officials and
producers.
To assess the issues related to the program's design, we interviewed
USDA officials, producers, and grain elevator operators and analyzed
data on county loan rates, posted county prices, loan deficiency
payments, and the costs of producing crops.
We performed our work at USDA headquarters, the Kansas City Commodity
Office, USDA's Farm Service Agency, state and county offices in North
Dakota and Texas, and the state office in Iowa. These states were
selected because their producers are major producers of eligible
crops, such as wheat, feed grains, upland cotton, and oilseeds, and
because they have a large number of program participants.
We performed our review from November 1998 through October 1999 in
accordance with generally accepted government auditing standards.
---------------------------------------------------------- Letter :9.1
We are sending copies of this report to Senator Richard A. Lugar,
Chairman, and Senator Tom Harkin, Ranking Minority Member, Senate
Committee on Agriculture, Nutrition, and Forestry; Representative
Larry Combest, Chairman, and Representative Charles W. Stenholm,
Ranking Minority Member, House Committee on Agriculture; and other
appropriate congressional committees. We are also sending copies of
this report to the Honorable Dan Glickman, the Secretary of
Agriculture. Copies will also be made available to others upon
request.
Please contact me at (202) 512-5138 if you or your staff have any
questions about this report. Key contributors to this report are
listed in appendix I.
Sincerely yours,
Lawrence J. Dyckman
Director, Food and
Agriculture Issues
GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
=========================================================== Appendix I
GAO CONTACTS
--------------------------------------------------------- Appendix I:1
Lawrence J. Dyckman (202) 512-5138
Ronald E. Maxon, Jr. (913) 384-7400
ACKNOWLEDGMENTS
--------------------------------------------------------- Appendix I:2
In addition to those named above, Dale A. Wolden, Fred Light, Jay L.
Scott, and Carol Herrnstadt Shulman made key contributions to this
report.
*** End of document. ***