Wheat, Feed Grains, Cotton, Rice, and Oilseeds
Provisions of the Enacted 1996 Farm Bill
 (See Endnote 1.)

Geoffrey S. Becker
Environment and Natural Resources Policy Division


 May 20, 1996

96-351 ENR

TEXT:

SUMMARY

 The "Agricultural Market Transition Act" (Title I of the 1996

farm law) ushers in a new system of price and income supports

for producers of wheat, feed grains, cotton, rice, and

oilseeds.  The new system offers a 7-year "production

flexibility contract" to producers with cropland enrolled in

the old grains or cotton programs in one of the past 5 years. 

Each contract will provide fixed, but declining, annual

payments that no longer are tied to market prices, to the

planting of a specific crop, or to annual land set-aside

requirements.  The new law earmarks about $37 billion through

2002, effectively creating, for the first time, an annual

limitation on such direct payments.  In addition, marketing

assistance loans are offered for most producers of wheat, feed

grains, rice, cotton, and oilseeds.

DESCRIPTION OF THE NEW PROGRAM

 For decades, federal law has required the U.S. Department of

Agriculture (USDA) to offer price and related support to

producers of nearly two dozen specified farm commodities. 

Through 1995, the primary price support tools for the crops

covered in this report--specifically wheat, feed grains (corn,

sorghum, barley, oats), rice, and cotton--were: (1) target

price deficiency payments, which increased when market prices

were low, and decreased when market prices were high; (2) crop

loans offered at harvest time; and (3) acreage reduction

programs, usually imposed as a condition of receiving support

payments and loans.  Support for oilseeds was limited to

loans.  The Department's Farm Service Agency, or FSA (formerly

the Agricultural Stabilization and Conservation Service) each

year announced a "program" stipulating what and how much a

participating farmer could plant, and what his or her crop

benefits would be, based on statutory formulas.

 These programs generally derived their authority from three

permanent laws which are still on the books: the Agricultural

Adjustment Act of 1938 (P.L. 75-430); the Agricultural Act of

1949 (P.L. 81-439); and the Commodity Credit Corporation (CCC)

Charter Act of 1948 (P.L. 80-806).  However, Congress has

frequently altered key provisions of these original laws--

usually through omnibus multi-year farm or budget bills--to

adjust to contemporary market conditions, control spending, or

address other policy concerns.

 The most recent legislation, the Federal Agricultural

Improvement and Reform (FAIR) Act of 1996 (P.L. 104-127),

again suspends most of the provisions of permanent law for

grains and cotton (section 171).  In their place, this new

farm law establishes, for the next 7 years, a new support

program under Title I, the "Agricultural Market Transition

Act," also known widely as "Freedom to Farm."  Following are

selected key provisions.

Production Flexibility Contracts 

 Under subtitle I-B, 7-year "production flexibility contracts"

are offered for fixed (but generally declining) annual

payments to producers with acreage that had been enrolled in

the old wheat, feed grains, upland cotton, and/or rice

programs in at least 1 of the past 5 crop years.  These

contracts replace target price payments.

 USDA has announced a one-time signup period for the

contracts, from May 20 through July 12, 1996; after that, only

producers with crop bases exiting the conservation reserve

program (CRP) can enroll.  Payments will be made in two

installments each year.

 Available funding.  Annual spending for the 7-year production

flexibility contracts is specified by section 113 of the law. 

The annual totals are allocated among crops based on the

following percentages, intended to reflect their previous

share of recent CCC outlays:  wheat, 26.26%; corn, 46.22%;

sorghum, 5.11%; barley, 2.16%; oats, 0.15%; upland cotton,

11.63%; rice, 8.47%.  The law also requires that the rice

allocation be supplemented by an additional $8.5 million

annually, beginning in FY1997.  This spending, which will

continue to be funded through the CCC, USDA's commodity

financing arm, is viewed as both a guarantee and a ceiling on

outlays (see table 1 for annual funding, by crop).

 Seven-year cumulative spending for commodity contracts is

locked in at $35.7 billion.  Provisions in the law require

that additional funding adjustments be made within the

individual crop allocations to compensate for past deficiency

payments made to, or repaid by, farmers.  The net result of

these adjustments is expected to add another approximately

$1.5 billion (over and above the $35.7 billion) to contract

funding.

 This upward adjustment in total available funding translates

into higher per-unit payment rates.  That effectively benefits

wheat, feed grain, and cotton farmers who, because crop prices

are now higher than anticipated a year ago, must repay the

advances they received on their projected 1995 deficiency

payments. (Unreturned advances will be deducted from

individuals' 1996 or 1997 contract payments).

 Previously, annual CCC outlays for income supports increased

or decreased depending upon market prices for supported crops. 

The new, fixed spending levels apply to contract payments

only; CCC annual outlays for crop loans, and for other

commodity programs and related activities, can continue to

rise and fall depending upon market and other conditions not

directly influenced by statute.

 Payments.  Section 114 specifies how payments will be

calculated, as follows:

--   USDA first will determine per-unit (per-bushel or per-

     pound) rates for each crop by (1) calculating, for each

     contract crop, total national production--set at 85% of

     total national contract acreage times farm program yield-

     -and then (2) dividing that amount into the total pot of

     money allotted annually for each of these crops.  Various

     estimates of average payment rates over the 7-year period

     have ranged as follows: 32 to 38 cents per bushel for

     corn; 37 to 45 cents per bushel for sorghum; 24 to 30

     cents per bushel for barley; 2.7 to 6 cents per bushel

     for oats; 61 to 67 cents per bushel for wheat; 7.1 to 8.1

     cents per pound for upland cotton; and $2.57 to $2.59 per

     100 pounds (cwt.) for rice.  These estimates are

     averages; payment rates generally decline each year over

     the life of the contract.  Final rates will be announced

     by USDA once officials determine the actual number of

     acres (national contract acreage) enrolled by U.S.

     farmers: fewer enrolled acres will mean higher rates, and

     vice versa.

--   Each farm's total annual payment for each contract

     commodity can then be calculated by multiplying the above

     payment rate times 85% of the "acreage base" times the 

     "program yield."  A farm's "acreage base" is the average

     acres planted or considered planted under the old program

     for the prior 5 years for wheat and feed grains, and the

     prior 3 years for upland cotton and rice.  "Program

     yields" (i.e., theoretical per-acre production under the

     old program) remain frozen at 1986 levels.  The total

     annual payment for those with multiple contract crop

     bases will be the sum of the calculations for each of the

     individual contract commodities.  An example of a

     contract calculation appears on page 6.

 Contract payments are tied to land, not individuals. 

Generally, section 111 stipulates that an individual must: (1)

own eligible farmland and assume all or part of the production

risk; (2) operate eligible farmland with a share-rent lease

with a landowner, who must sign the same contract; (3) operate

eligible farmland that is cash-rented (rules here vary

depending upon lease duration).  USDA must continue a policy

of protecting the interests of tenants and sharecroppers. 

Precisely how this will be accomplished--and whether, as some

critics predict, landowners will have a greater advantage over

tenants than in the past--remains to be seen.

 Planting flexibility.  Previously, each commodity program

participant's farm had a separate acreage base for each

program crop, and with some exceptions had to be planted to

the specified crop, but not in excess of the acreage base. 

The new law combines crop-specific bases into a single

contract acreage base for each farm.  Section 118 effectively

permits participating farmers to plant any combination of

wheat, feed grains, cotton, rice, oilseeds, or other crops on

the entire contract acreage (or put the land into a conserving

use).  Generally, fruits and vegetables cannot be planted on

contract acres; however, exceptions apply for USDA-specified

regions with a history of double-cropping contract commodities

with fruits or vegetables, and for individuals with a fruit

and vegetable planting history.  Unlimited haying and grazing

is permitted on all acreage, including contract acreage.  On

land outside of the contract acreage, there are no constraints

on the choice of crops.

 Section 111 explicitly requires that contract land be used

for agriculture-related activities, which would include

conservation uses, and that contract holders satisfy

conservation compliance and wetlands protection regulations. 

Farmers no longer are required to buy catastrophic crop

insurance to receive contract benefits, as long as they waive

eligibility for any disaster assistance (section 193).

 No annual acreage reduction.  Section 171 repeals USDA's

authority to impose annual cropland diversion requirements

(notably, an Acreage Reduction Program, or ARP) that shift

acreage out of crop production and into conserving uses.  ARPs

were imposed in the past to reduce acres eligible for payments

and thereby cut federal expenditures, and also to raise market

prices by reducing supplies.

Crop Loans

 Under subtitle I-C, nonrecourse marketing assistance loans,

and loan deficiency payments, continue to be available upon

harvest.  Section 132 generally requires that the rates per

bushel (or per pound) be set at 85% of average market prices

for the preceding 5 years, excluding the high and low years

(the upland cotton formula differs somewhat).  As table 2

indicates, maximum rates are specified for all crops.  Some

have minimums, and USDA has authority to lower wheat and feed

grain rates by as much as 10% to minimize surpluses.

 Eligibility for wheat, feed grains, upland cotton, and rice

loans is limited to those with production flexibility

contracts, although the entire farm's production (not just

contract acres) can qualify.  However, all oilseed and extra-

long staple (ELS) cotton is eligible at harvest, whether or

not it is grown on a contract farm (oilseeds and ELS cotton

are not considered "contract" crops eligible for payments).

 Loan repayment provisions.  Technically crop loans must be

repaid with interest within 9 months (10 months for cotton) of

borrowing or else the producer forfeits the collateral crop to

the government, which has "no recourse" other than to accept

it in lieu of repayment.  However, section 134 continues the

concept of "marketing loans," which enable the farmer to repay

the loan at a USDA-calculated rate that is intended to

approximate market prices.  If that repayment rate is below

the original USDA loan rate, the farmer captures the

difference as an inherent subsidy.  Moreover, loan deficiency

payments (equal to marketing loan gains) also are made to

eligible producers who choose not to take out loans (section

135).

 Under section 135, USDA will continue to calculate cotton and

rice loan repayment rates based on world market prices. 

Wheat, feed grains, and oilseeds repayment rates will be

calculated so as to minimize loan forfeitures and government

surplus acquisitions, and to encourage the movement of

commodities into private markets (likely to be the local

elevator or "posted county" price).  Under section 163,

interest rates that producers pay on new commodity loans are

increased by 1%.

 Section 171 suspends the farmer-owned reserve, which

permitted wheat and feed grain producers (under specified

surplus conditions) to extend their loans for up to an

additional 27 months or more.  Cotton loans no longer can be

extended for an extra 8 months; however, so-called cotton

"Step 2" payments, made whenever U.S. cotton prices are more

than 1.25 cents per pound above world prices, are continued,

subject to a 7-year spending limitation of $701 million

(section 136).

Annual Payment Limits

 Annual contract payments are limited by section 115 to no

more than $40,000 per "person" actively engaged in farming

(compared with $50,000 previously for target price deficiency

payments).  Marketing loan gains or loan deficiency payments

remain limited to a separate $75,000 per person.  There is no

change in the so-called "three entity rule" which permits a

person to receive up to half of the above annual limitations

on each of two more farms, effectively enabling total benefits

to reach $230,000 annually (a total of $80,000 in contract

payments and another $150,000 in marketing loan gains). 

Annual payment limitations apply to the sum of benefits for

all crops; there is not a separate cap for each crop.

Commission on 21st Century Production Agriculture

 Subtitle I-G establishes a Commission on 21st Century

Production Agriculture to conduct a comprehensive review of

U.S. agricultural conditions, the effects of the new market

transition contracts, and related issues, and to make

recommendations for future farm policy.  Initial and final

reports are due by June 1, 1998, and January 1, 2001,

respectively.

Determining a Producer's Annual Contract Payment: Example

 (Theoretical example is a farmer with 300 acres of corn base

and 450 acres of upland cotton base.)

CORN CONTRACT ACRES:                            300 acres

(1996 "acreage base"--average acres planted

or considered planted for the prior 5 years)

TIMES 85%:                                          255 acres

TIMES PROGRAM YIELD:                            120 bushels/acre

(frozen at 1986 level)

EQUALS PAYMENT QUANTITY:                        30,600 bushels

TIMES PAYMENT RATE:                             38 cents

(example; actual rate to be determined

by USDA)

EQUALS TOTAL PAYMENT FOR CORN:                  $11,628

COTTON CONTRACT ACRES:                          450 acres

(1996 "acreage base"--average acres planted

or considered planted for the prior 3 years)

TIMES 85%:                                          382.5 acres

TIMES PROGRAM YIELD:                            600 pounds/acre

(frozen at 1986 level)

EQUALS PAYMENT QUANTITY:                        229,500 pounds

TIMES PAYMENT RATE:                             8 cents

(example; actual rate to be determined

by USDA)

EQUALS TOTAL PAYMENT FOR COTTON:                $18,360

TOTAL ANNUAL CONTRACT PAYMENT:                  $29,988

(Producer can plant any crop or combination of crops, except

for restrictions on fruits and vegetables, on the entire 750

acres.  On any additional acres on the farm, there are no

restrictions.)

                          ENDNOTES

(1)  Sources include: the conference report accompanying the

1996 farm bill (H.R. 2854; H. Rept. 104-494); fact sheets

issued by the U.S. Department of Agriculture; various reports

by the Agriculture and Food Policy Center of Texas A&M

University; and recent CRS reports.