Farm Commodity Programs: Direct Payments, Counter-Cyclical Payments, and Marketing Loans

Publication Date: March 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Agriculture, forestry and fishing

Type:

Abstract:

Commodity support provisions in the Farm Security and Rural Investment Act of 2002 (P.L. 107-171, the 2002 farm bill) include three primary types of payments: (1) annual direct payments unrelated to production or prices, (2) counter-cyclical payments which are triggered when prices are below statutorily-determined target prices, and (3) marketing assistance loans that offer interim financing and, if prices fall below statutorily-determined loan prices, additional income support.

These programs provide a safety net to protect farmers from falling prices and raise farm income levels. These policies, however, may contribute to world trade distortions, raise land prices and costs of production, and concentrate benefits among certain commodities and producers.

This report describes the payments for wheat, feed grains, cotton, rice, oilseeds, peanuts, wool, mohair, honey, and certain other small grains. These commodities have similar rules, and generally account for about two-thirds of USDA farm commodity program outlays. Examples are provided to illustrate how the payment mechanisms work.

To receive payments, an individual must share in the risk of producing a crop and comply with conservation and planting flexibility rules. Each commodity program has an annual payment limit per farm or individual, but these limits, in practice, are not constraining because some large farms can be reorganized to meet the rules, or marketing loans can be repaid in such a way as to avoid the limits.

Total actual and estimated payments for these commodities under the 2002 farm bill (FY2003-05 actual and FY2006-08 estimated) range from $6.7 billion in FY2004 to an estimated $14.4 billion in FY2006. Direct payments are nearly constant at $5.2 billion annually. Counter-cyclical payments may range from less than $1 billion in FY2004 to an estimated $5.1 billion in FY2007. Total marketing loan benefits may range from $0.6 billion in FY2004 to an estimated $5.3 billion in FY2006. By commodity, feed grains (primarily corn) clearly receive most of the total support, followed more distantly by cotton, wheat, oilseeds (primarily soybeans), and rice.

This report will be updated if substantial changes occur.