Farm Commodity Programs: An Overview


Background

Farm commodity programs are administered by the United States Department of Agriculture (USDA) with most financial transactions handled through the Commodity Credit Corporation (CCC), a federally owned and operated corporation within the USDA.  The commodity programs are authorized by three basic statutes:  the Agricultural Adjustment Act of 1938, the Agricultural Act of 1949, and the Commodity Credit Corporation Charter Act of 1948.  These statutes are modified by the farm bills, which generally guide commodity programs for six years, and other emergency or temporary legislation, which affects the programs for shorter periods of time.

Throughout American history the federal government has used its legislative power to promote farm policies, and commodity programs are a direct extension of those policies.  Depending on how the term “farm commodity program” is defined, programs have existed since the late 1700s.  From that time until the beginning of the 20th century, federal legislation developed that provided free land to anyone willing to settle and farm it, creating an independent family farm system.  Although not targeted specifically at commodities, the net result was an increase in commodity production.  During the mid-1800s and continuing through the 1920s, federal farm policy focused primarily on education, research, and some marketing assistance.  Legislation during this period created the Cooperative Extension Service and exempted farmer cooperatives from antitrust regulation in an effort to improve farm production and marketing.  This legislation helped improve farm productivity, but farm income was still unstable and often low.

The Great Depression era and President Franklin Roosevelt’s New Deal legislation combined to create the farm commodity programs as they are currently known, programs designed to support prices and incomes through the use of supply controls.  This type of commodity program continued through the 1996 Farm Bill, when commodity programs began shifting into a market-oriented system with decreased income supports and increased planting flexibility.  Declining prices for several years after the 1996 Farm Bill resulted in expensive emergency support legislation from Congress for producers, and the 2002 Farm Bill was enacted to avoid those expenses.  The 2002 Farm Bill continued many of the market transition commodity programs of the 1996 Farm Bill but added additional price support measures.  The 2008 Farm Bill maintained the framework of the 2002 Farm Bill with some modifications.  Target prices and loan rates were altered, and some programs were added.  In addition, payment limitation rules were changed with some rules being relaxed and others tightened.  This overview focuses on the farm commodity programs of the 2008 Farm Bill, the Food Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1651 (to be codified in scattered sections of titles 7, 15, 16, and 21 of the U.S.C.). For text, history, analysis, and background information on past and present United States Farm Bills, please visit our United States Farm Bills page.


Price Loss Coverage

In a sweeping change, the 2014 Farm Bill eliminated the direct payments that had been a feature of the previous two Farm Bills and replaced them with two commodity programs: Price Loss Coverage (PLC), and Agricultural Risk Coverage (ARC). Farmers had to make a one-time decision about which program they would adopt. Each program provides income support to farmers under adverse price or yield conditions at levels above where their regular crop insurance may apply.

Under the PLC program, farmers receive payments if a covered commodity’s US marketing year price drops below the “reference price” (a new term for target price) specified in the Farm Bill. The payment will equal the maximum of either the reference price minus the average marketing year price or the reference price minus the loan rate.

Farmers who choose the PLC program will also be able to purchase the new Supplemental Coverage Option (SCO) as an add-on to existing crop insurance coverage. The SCO will essentially allow farmers to insure their remaining insurance deductible using a county-level yield coverage that mirrors the type of individual coverage that is already in place.


Agricultural Risk Coverage

Farmers who choose to use the Agricultural Risk Coverage (ARC) program, must then choose between ARC-County and ARC-Individual. Under the ARC-County option, crop revenue will be estimated based on county-wide yield and farmers will receive payments if the ARC-County actual crop revenue is less than the ARC-County revenue guarantee. Under the ARC-Individual option, farmers will receive payments if the actual revenue from all covered commodities is less than the ARC-Individual guarantee.

The ARC-County option measures actual crop revenue by multiplying the actual county yield by the maximum of the actual marketing year price or the loan rate specified in the Farm Bill. The guarantee under the ARC-County option is 86% of the ARC-County benchmark revenue. The benchmark revenue is the product of the most recent 5-year Olympic-average county yield and the most recent 5-year Olympic-average marketing year average price. The Olympic-average itself is determined by dropping the highest and lowest yield or price from the most recent 5 years and calculating the average based on the remaining 3 yields or prices. The ARC-County program is essentially a county-level “revenue option” offered to farmers that will be triggered under 3 possible scenarios: low US average prices and low county yields; average US prices and low county yields; and average county yields and low US average prices.

The ARC-Individual program uses farm-level yields instead of county-level to calculate the 5-year Olympic-average yield in the benchmark revenue for determining the yield for the actual revenue for each covered crop produced in a particular crop year. The U.S. marketing year average price is still used for the price component of revenue in both calculations and is calculated the same way as for ARC-County. To determine total farm level revenue, a weighted average of the per acre revenues is calculated where the weights are the relative percentages of total planted acres of covered crops allocated to the particular crop.


Marketing Assistance Loans

Marketing assistance loans (MALs) are short-term nonrecourse loans to producers who use covered commodities as collateral.  These loans are designed to provide producers with cash at harvest and allow them to market the commodities throughout the year.  Because the loans are nonrecourse, producers may forfeit the collateral in full satisfaction of the loan.  Thus, when market prices drop below loan rates, MALs become an income support tool.  The covered commodities under the MAL program are the same commodities as the DP and CCP commodities and also wool, mohair, honey, peas, lentils, and chickpeas.

Due to government expenses associated with the storage and disposal of forfeited commodities, repayment provisions are designed to discourage forfeiture.  When market prices are below loan rates, producers may repay the loans at local market rates determined by the USDA and retain title to the commodity for future marketing.  The lower repayment rate provides farmers with a marketing loan gain and the ability to sell the commodity without creating a large government-owned surplus.

Another method used to prevent a large government-owned surplus of farm commodities is a loan deficiency payment (LDP).  LDPs are a part of the MAL program and provide the same benefit to producers as marketing loan gains without the burden of storing the commodities and the paperwork associated with receiving the marketing loan.  Producers that agree not to acquire marketing loans are eligible for the LDP.  The LDP is calculated as the difference between the loan rate and the alternative repayment rate.


Peanuts

Under the 2002 Farm Bill, peanut production is shifted from a quota system to a system using DPs, CCPs, and MALs.  The peanut program follows the same general outlines as the covered commodity programs discussed above.  In addition, holders of the repealed peanut quotas receive payment based on the lost value of that asset.  The 2008 Farm Bill maintained this provision.


Dairy

The Farm Bill utilizes several programs to assist dairy farmers.  Milk marketing orders classify and set minimum prices for milk based on its intended use.  Milk price support is also facilitated by government purchases of butter, dry milk, and cheese.  Dairy market loss payments also provide producers with payments when milk prices fall below a certain amount in Federal Milk Marketing Order 1, and subsidies are provided to milk exporters.


Sugar and Tobacco

Under the direction of the Farm Bill, both sugar and tobacco commodity programs are intended to operate at no net cost to the government.  These programs utilize quotas, allotments, and nonrecourse loans in an effort to support market prices.


Discretionary Commodity Programs

The USDA is authorized to use discretionary funds to support nearly any farm commodity as deemed necessary. These programs are often used to purchase surpluses of agricultural commodities or to provide producers with disaster relief.


Payment Limitations

Like the 2002 Farm Bill, the 2008 Farm Bill limits the amount of commodity program payments that an individual or entity can receive. Under the 2002 Farm Bill, a producer was ineligible to receive DPs or CCPs if his or her three-year average adjusted gross income exceeds $2,500,000.00, unless 75% comes from agricultural operations.

Under the 2014 Farm Bill, the payments available under the PLC and ARC programs are $125,000. There is also a separate payment limit of $125,000 for the corresponding payments made to a person or legal entity for peanuts. Producers will be ineligible to receive payments from the PLC and ARC programs if his or her three-year average adjusted gross income exceeds $900,000.

The $75,000.00 limit for marketing loan gains was eliminated in the 2008 Farm Bill due to the ease of avoiding this limit.  Under the 2002 Farm Bill limits on marketing loan gains could be avoided because there was no volume or monetary limit on the amount of commodities that could be put under loan and forfeited to the CCC. This allowed producers to put commodities under loan and capture marketing loan gains while retaining those commodities up to the payment limit and then forfeiting the surplus commodity that would be above the payment limit. The commodity certificate program also allowed the recovery of the forfeited commodities above the payment limits. Producers may purchase commodity certificates for the same price as the reduced loan repayment price up to the amount of commodity under loan and immediately redeem the certificates for the commodity used for loan repayment, and the certificates do not count toward the payment limit.

Under the 2002 Farm Bill, the three-entity rule allowed a producer to receive twice the total limit amount by receiving one full limit on a farm and then two one-half limits on an additional two farms.  However, the 2008 Farm Bill eliminated the three-entity rule.  Instead, it requires direct attribution of commodity payments, which means that payments must be attributed to individuals as opposed to corporations or partnerships.  Individuals can now receive payments on any number of entities, but the total payments cannot exceed the payment limits.  The “spousal rule” is still applicable in the 2014 Farm Bill, meaning that a husband and wife can be treated as separate persons, effectively doubling the payment limit.


Limitations on Eligibility

Like the 2002 Farm Bill, the 2014 Farm Bill has an eligibility cap that determines payment eligibility based off a single adjusted gross income (AGI) limit. The cap applies to most commodity programs and payments, but does not apply to premium subsidies received by farmers participating in the crop insurance program. The 2014 Farm Bill AGI cap is set at $900,000.