Congress and Consolidation: Inside the Farm Bill

(Editor's Note: The farm bill passed in the U.S. House of Representatives on a 231-191 vote today, July 27. The House bill, supported by 19 Republicans and all but 14 Democrats, includes requirements for country of origin labeling on meat. It curtails payments to farmers with incomes over $1 million and dedicates money for conservation and nutrition programs. The Senate will take up its version of the farm bill in September. Check the details in this story from the Associated Press [1].)

Warehousing Grain
Photo: USDA [2]

Stories about the upcoming vote on the farm bill will mostly describe limits (or lack of them) on subsidies. But there's more than meets the eye, especially if you look at history -- at how federal laws have both changed farming practices and determined who is left to farm.

In the decades leading up to 1996, legislation intended to improve the lot of American farmers attempted to raise commodity prices by direct support and by managing supply. The primary method of price support for grains was to make direct loans at a preset price per bushel. Most loans were for a 9-month period. Growers were permitted to pay the loan and accrued interest at any time during those nine months. If average market prices at the time of loan maturity were below the rate at which the loan had been made, growers had the option to deliver the grain to Commodity Credit Corporation warehouses in lieu of paying back principal and interest. The CCC would either release the commodity onto the market or hold it for an extended period of time.

The 1996 Farm Bill offered the first marketing loans. Rather than accept responsibility for maintaining costly grain storage facilities, Congress chose to allow grain prices to seek their own levels in the hope of clearing the markets of surplus. Congress set a per bushel loan rate on feed grains and oilseeds that was lower by roughly 30% than past loan rates. If market prices went lower than loan rates, growers were permitted to repay their loans at a reduced rate, based on the lower market price. In addition, any time prices dropped below loan rates, all accrued interest would be forgiven.

The difference between the loan rate for grains or oilseeds and the amount actually repaid is called a Loan Deficiency Payment (LDP). Cash payments of LDPs are available in lieu of taking loans, and are subject to limits. While the original intent of Congress may have been to limit LDP's, a little known loophole inserted into the bill enabled large farms to collect unlimited payments of LDPs by first mortgaging the commodity, and then redeeming it at a discount with certificates obtained from FSA. Loan Deficiency Payments collected in this way did not count against any limit.

The '96 Farm Bill was also revolutionary in that for the first time ever growers of oilseeds, like soybeans, would receive payments the same as those for grain crops. Oilseeds were also made eligible for marketing loans.

Like most farm bills over the decades, the '96 farm bill provided for direct payments to producers. Direct Payments (DP) have been utilized many times as cash infusions to supplement the incomes of U.S. farms that experienced difficulty due to low prices or production problems, but the '96 farm bill was different: in the 1996 bill Congress said that over a seven year period, it would end the practice of making direct payments. The direct payments were referred to as "transition payments," and were to be used by farmers to get their economic houses in order as the US moved to free markets.

Later, in the 2002 Farm Bill, Congress reversed course and established a Counter Cyclical Payment (CCP) that was to be paid when prices dropped below an established target price for grains and oilseeds. Farmers were allowed to request advance CCP payments based on USDA price projections. Those unearned prepayments of CCP's had to be repaid if actual market prices came in higher than projections. As it turned out, fluctuating supply brought about by weather and demand made it difficult for USDA to make consistent, large CCP payouts. That instability created problems for some farmers who had already received advance payments that had to be repaid. Congress reinstated direct payments in the form of Direct Cyclical Payments (DCP). Besides being extremely popular with recipients (for obvious reasons), overpayment of CCP could be deducted from DCP before they were paid, which solved the problem of delinquencies without taking any action against growers.

The '96 farm bill rejuvenated the move to cash renting of farmland. In the early 80's some farmers became known as "Young Tigers" for their relentless appetite to operate large acreages. Increasingly, the Young Tigers turned to outright purchase, as well as cash rent, in order to expand their farms and gain control of as many acres as possible. An agricultural recession beginning in the mid "˜80s lasted well into the mid 90's before Congress took action. That action was the '96 farm bill, which set off another cash rent boom of American farmland. The most aggressive farmers recognized just how lucrative Freedom to Farm, the name given the '96 bill, really was. They clamored not only for more land, but also for an increase in the payment limits that Congress had established. Within one year Congress reacted by doubling the established limits. And that legislative action set off one of the most far-reaching consolidations of U.S. farms in the nation's history.

With the help of many multinational corporations and special interests, large farms and their promoters have been able to shift the emphasis of farm programs from assisting small and average-sized farms where rural families live and work, to encouraging expansion of large factory farms that supply raw material needed by large corporate agriculture. By failing to enforce the Packers and Stockyards Act as well as failing to enact a strong competition section in past and present farm bills, Congress has turned a blind eye toward traditional farms and ranches that produced not just grain or livestock, but utilized each aspect of healthy agriculture in an economical and diversified way.

So payment limits are only the tip of the iceberg. It is the attitude in Congress, lurking beneath the surface of the farm bill, that constitutes the real hazard for our farms, our rural communities and America as a whole.