THE EFFECTS OF THE 1996 FARM BILL ON FOOD AND FEED GRAINS

The 1996 Farm Bill, now known as the FAIR (Federal Agricultural Improvement and Reform) Act of 1996, has been portrayed as reforming U.S. agricultural policy. Gone are set aside and base acreage controls over farm planting decisions. Gone, too, are deficiency payment programs that provided protection against downward price movements for producers of program commodities. According to conventional wisdom, the FAIR Act provides an environment in which farmers enjoy greater production flexibility, but face much more risk. In fact, careful examination of the FAIR Act innovations leads to the conclusion that no radical changes have been made in food and feed grain agricultural policies, and that it is unlikely that the FAIR Act will cause large changes in crop acreages. The framework for the agricultural price and income support programs of the 1980s and 1990s was established by the 1973 Agriculture and Consumer Protection Act. The key elements for wheat, barley, and rice were target prices and deficiency payments and price supports for each crop through nonrecourse loan programs. In contrast, the FAIR Act creates a much simpler system of transfer payments for food grain and feed grain producers. Nonrecourse loan programs remain, but variable deficiency payments are replaced by fixed market transition payments for the period 1996 to 2002. For each program crop, producers receive payments of 85 percent of their 1996 crop acreage base multiplied by their 1995 program crop yields. Producers can plant any crops (other than fruits and vegetables) on their land (unless it is CRP land). This paper discusses the following aspects of the farm program: Decoupling: Most links at the farm level between current production decisions and current or future deficiency payments were severed by the provisions of the 1985 Act which froze program yields at 1985 levels. The FAIR Act can therefore be viewed as simply completing a decoupling process between deficiency payments and production decisions, by ending the system that actually required farmers to plant program crops on base acres to receive government transfer payments. Elimination of acreage reduction programs: By the 1990s the role of ARPs in controlling supplies had diminished for wheat and feed grains, partly because of the 1988 and 1989 droughts which reduced inventories, and partly because of higher prices associated with the advent of the CRP and land retirement through the 0-92 program. Their abolition in 1996 has therefore had little effect on the farm decision making environment. Production Flexibility: The rules governing base acreage calculations under the 1981 and 1985 farm bills made it costly for producers to switch to nonprogram crops like soybeans. However, these problems were mitigated in the 1990 Act which allowed program crop producers to reallocate up to twenty-five percent of their base acres to other crops. In fact, the planting flexibility provided by the 1990 Act has never been fully utilized by producers. The planting flexibility of the 1996 Act therefore seems unlikely to have significant effects on farmers' planting decisions. Federal Spending: Whether the FAIR Act involves a cut in support for feed and food grain producers is also unclear. Under the Act, wheat and feed grain producers will receive $29.2 billion in market transition payments over the next seven years. Based on current estimates, these payments are likely to be higher than those that would have been made under the 1990 Act provisions because wheat and feed grain prices are forecast to be relatively high over the period 1996- 1997. Farm Income Variability: Much has also been made of the effects of the FAIR ACT on "the farm safety net." Yet, in fact, price-based deficiency payments provided little income stability to producers with low yields when prices were high, since in that case deficiency payments were small. In fact,increased planting flexibility may actually provide some degree of income stability to producers by allowing them to respond to shifts in relative prices for different crops. In addition, the 1996 Act provides minimum guarantees for revenue streams through the market transition payment system. As these payments decline over the duration of the Act, they will become less important as a source of income stability. By 2002, Congress will have to readdress farm programs, including food and feed grain policies. Whether the 1996 Act represents the end of large scale farm subsidies therefore remains an open question. One interpretation of the 1996 legislation is that it is providing aid to the farm sector as it moves towards a "new subsidy" environment rather than a "no subsidy" environment. In the interim, although the FAIR Act involves substantive changes in the structure of U.S. agricultural policy, its actual effects on agricultural production seem likely to be small