Specialist in Agricultural Policy
Resources, Science, and Industry Division
Updated December 13, 2000
Marketing assistance loans for the major crops were designed to facilitate orderly
marketing by providing short-term financing so that farmers could pay their bills right
after harvest and spread their sales over the entire marketing year. However, the
persistence of very low commodity prices transformed the loan program into a major vehicle
of farm income support. Marketing loan program benefits (primarily loan deficiency
payments, LDPs) to farmers amounted to about $5.9 billion in 1999, and will exceed $6.5
billion in 2000. Such levels of use and high costs have revealed several administrative
problems and given rise to several policy issues. Some policy makers have favored
broadening the scope and enhancing the benefits of the program to achieve greater farm
income support. Anticipated adverse market impacts have discouraged adoption of these
proposals to date. A persistent policy issue is the payment limitation on marketing loan
Support provisions in the 1996 farm bill (P.L. 104-127) (1) for wheat, feed grains, cotton, and
rice includes two primary elements - (1) annual fixed production flexibility contract
payments, and (2) the continuation of marketing assistance loans. Soybeans and minor
oilseeds, while not eligible for production flexibility contracts, can utilize marketing
assistance loans. It was anticipated that contract payments, averaging about $5 billion
per year, would serve as farm income support, and marketing assistance loans would
facilitate orderly marketing at little or no federal cost. Unanticipated and persistently
low market prices altered the outcome. The contract payments have been supplemented with
emergency "market loss payments" in 1998, 1999, and 2000. In addition, the
marketing loan program has become a major source of "counter-cyclical" farm
income support, amounting to $1.792 billion in 1998, an estimated $5.894 billion in 1999,
and $7.651 billion is forecast for 2000. (2)
This report explains the design and operation of marketing assistance loans and examines
some of the administrative and policy problems that have arisen.
Loans Facilitate Orderly Marketing
Nonrecourse marketing assistance loans are available only to the producers of wheat,
rice, feed grains, oilseeds, and upland cotton.
(3) Eligible producers can pledge their harvested commodities as collateral for
interest-bearing loans (4) from the
U.S. Department of Agriculture's (USDA) Commodity Credit Corporation (CCC). The loans
mature in 9 months, but can be repaid earlier. The primary purpose of this loan program is
to give farmers short-term funds from which to meet expenses until the commodities are
marketed, hence the name marketing assistance loans. An important motivation for the
government to provide such loan funds is to encourage orderly sales through the coming
year. In the absence of credit, some farmers might be compelled to market their crop
immediately after harvest, thereby oversupplying the market and receiving lower prices.
Marketing loans make it possible for these farmers to sell in response to market price
signals rather than creditor pressure.
The Federal Agriculture Improvement and Reform (FAIR) Act of 1996 (P.L. 104-127)
capped the loan rates at their existing 1995 levels through the 2002 crop year. Other
important commodity provisions in this farm bill included the replacement of target price
deficiency payments with fixed "contract" payments of about $5 billion per year,
the elimination of annual acreage diversion programs, and greater farmer control over
production and marketing decisions with the expectation that they would assume more and
the government less of the risk associated with the price instability.
Loans Support Farm Income
Nonrecourse commodity loans also serve the purpose of counter-cyclical income support
when cash market prices drop below the loan rates. Since the loans are nonrecourse,
farmers can fully satisfy the debt repayment obligation by forfeiting the commodities
pledged as collateral. In effect, when farmers forfeit pledged commodities, they are
selling them to the CCC for the loan price. Some observers of farm policy describe the
loan program price guarantee as one element of the federal farm income safety net.
Commodity forfeitures remove supplies from the market and, if the volume is sufficiently
large, raise market prices for all farmers. Historically, this forfeiture mechanism served
as a supply management/price support feature of USDA's commodity price and farm income
Commodities forfeited to CCC eventually come out of inventory, potentially displacing
commercial sales and depressing market prices, which is a serious weakness in the use of
nonrecourse loans to support market prices. In the past, to minimize this impact, large
amounts were donated to developing countries, distributed through domestic food assistance
programs, or diverted to nontraditional industrial uses.
CCC acquisition, storage, and disposal of forfeited commodities proved to be a costly,
complex, and market distorting mechanism for supporting farm income. A transition out of
commodity price support and toward direct farm income support began in the early 1970s. In
place of supporting prices, the CCC shifted to making direct payments (called deficiency
payments) to cover the difference between target prices, set by law, and lower market
prices. Loan rates were gradually reduced in order to facilitate orderly marketing without
interfering with market prices. By 1986, it had become an explicit policy that loan
operations would not be used to isolate stocks from commercial markets in order to support
prices. Under the alternative of making target price deficiency payments to support
income, various production control mechanisms (such as acreage set-asides, acreage
diversions, and cropland conservation reserves) were implemented to reduce supplies, raise
market prices, and limit the amount of federal money spent for income support.
The FAIR Act of 1996 went even further to separate income support from intervention in
commodity markets. Producers of wheat, feed grains, rice, and upland cotton were assured
fixed, but gradually declining, annual contract payments for crop years 1996 through 2002,
along with the freedom to plant (or not plant) nearly any crop and without any government
limits on acreage. One motivation for this shift in policy was the tendency of other
countries to increase planted acreage when U.S. farmers were required to take land out of
production. The policy change was an explicit recognition that it was impossible to manage
world supplies by limiting planted acreage only in the United States. The new policy
retained nonrecourse marketing assistance loans, but capped loan rates at their 1995
Marketing Loan Repayment Provisions
The marketing assistance loan rates were set below normal downside market price
fluctuations, but occasionally prices do drop lower. Wheat, corn, and soybean prices
during and after harvest in 1998, 1999, and 2000 are cases in point. When market prices
drop below loan rates, borrowers have the option of repaying the loans at local market
prices (called posted county prices for wheat, feed grains, oilseeds, and adjusted
world prices for rice and upland cotton (6))
and retaining ownership of the commodities. Posted county prices for wheat, feed grains,
and soybeans are previous-day nearby terminal market prices adjusted by CCC's County
Average Location Differentials (largely transportation cost adjustments) to reflect the
local cash market values.
This alternative repayment provision accomplishes several important objectives. It
leaves the commodities in the hands of the farmers, and they (rather than the CCC) make
the future marketing decisions. All of the costs and complications of government storage
and disposal of inventories are avoided. Also, farmers have the opportunity to later sell
the commodities at prices higher than their loan repayment rates. The difference between
the loan rate and the lower repayment rate is called the marketing loan gain for
the farmer. The gain is considered a government payment and is taxable farm income.
Loan Deficiency Payment Provisions
When market prices fall below the commodity loan rates, the opportunity to obtain
marketing loan gains might encourage nearly all farmers to obtain loans, even those who
would not otherwise do so. To avoid this, farmers may choose to receive loan
deficiency payments (LDPs) in lieu of securing and repaying the marketing assistance
loans. The loan deficiency payment is the calculated difference between the loan rate and
the alternative repayment rate (the posted county price or adjusted world price). So, when
market prices fall below loan rates, farmers who agree to forego loans have the same
opportunity to benefit as do farmers with loans. For 1998 crops, spot market prices fell
low enough that LDPs were made to producers of most eligible commodities. By early
December 2000, the CCC had paid $2.7 billion for 1998 crop LDPs, $6.1 billion for 1999
crop LDPs, and $4.8 billion for 2000 crop LDPs.
Low prices have transformed a program devised as short term marketing assistance into
also a major income support program. This transformation has revealed several
administrative design difficulties and provoked several controversial policy questions.
Payment Limitations. Together, the combination of all marketing loan gains and
LDPs is called the marketing loan benefit and is subject to an annual per-person
payment limit of $75,000. Low prices have put many large and even mid-sized farms up
against the limit. When farmers reach the payment limit they can put all of the remaining
crop under loan and forfeit the stored commodities to settle the loan. Receiving forfeited
commodities is just as expensive for the CCC as making LDPs. Congress addressed the
problem by doubling the payment limit to $150,000 for 1999 crops (P.L. 106-78).
Also, in February 2000, the Secretary of Agriculture implemented a commodity certificate
program (authorized by P.L. 106-78, Sec
812) to discourage forfeiture of loan collateral commodities. Farmers may purchase
certificates at the posted county price up to the quantity of grain or cotton under loan,
and then immediately trade the certificates to recover commodities under loan. While
purported to discourage commodity forfeitures, certificates effectively serve to
circumvent the payment limitation.
While certificates appear to eliminate the constraints created by payment limitations,
there are problems. First, certificates require that commodities be put under loan. To put
commodities under loan they must be held in storage. This necessitates storage facilities
with adequate capacity. There is significantly more paperwork and time involved in
processing a commodity loan than an LDP. The paperwork is a burden on the limited county
Farm Service Agency staff, and (while commodities are in storage) storage expenses accrue
to the farmer. In contrast, LDPs can be exercised as soon as the crop is harvested and
with little paperwork, thereby facilitating immediate sale and shipment. Another problem
is that loan rates for high moisture corn, corn silage, and low quality grains are sharply
discounted. These same commodities would suffer no discounts under LDP rules. The 2000 and
2001 crops of wheat, barley, and oats that are grazed and never harvested are eligible for
an LDPs, but the "production" does not serve as loan collateral and can receive
no benefit from a certificate program. (7)
The problems associated with certificates encouraged adoption again of the $150,000
payment limit for 2000 crops (P.L. 106-387,
Sec 837). There are critics who believe that an increase in the payment limit would be
inconsistent with targeting federal assistance to small family farms, and that aiding
large farms encourages their growth at the expense of small farms. Others are critical of
additional farm subsidies without any test of financial need being applied to the farmers.
County Loan Rates and Posted County Prices. It became apparent after the 1998
grain harvest that the spread between posted county prices and county loan rates was
widely different in some nearby locations. Farmers complained of inequities. Then some
elevators began reporting they were losing customers to nearby locations where higher LDPs
were available. At least three conditions were contributing to the inequities. First, the
USDA admitted that county loan rates did not reflect geographical differences in market
prices because adjustments had not been made in a very long time for wheat and feed
grains. The needed loan rate decreases in some locations were so large that the
anticipated criticism prevented the USDA from taking action. Second, there was a single
county loan rate for wheat, but a posted county price for each separate class of wheat.
Third, the calculation of posted county prices necessitated setting boundaries around
terminal markets and these boundaries gave rise to differences between adjoining regions.
In early 1999, USDA considered, but did not implement, replacing daily posted county
prices with a daily posted national price. Critics charged that this change might
eliminate terminal market boundary problems, but would not solve the problem of outdated
county loan rates, or wheat class differences. No action has been taken to correct
geographic and grain class inequities.
Loan Rate Caps. In an effort to raise farm income in the face of low prices,
some Members of Congress have proposed that the loan caps imposed by the FAIR Act be
removed (H.R. 217, H.R. 1299, S. 30) and that loan rates
be increased (H.R. 4949). (8) Higher loan rates would be a policy
change of substantial consequence. During a period of low market prices, higher loan rates
translate into larger marketing loan benefits. Members who oppose higher loan rates fear
that the market-directed reforms of the FAIR Act would be undermined. It is argued farmers
would base their production decisions on loan rates rather than market conditions. Land
that might shift to more profitable crops based on market prices and relative production
costs could be attracted to the most beneficial loan program. Some economists feel such a
distortion already has been happening in the case of soybeans, where the loan rate covers
a larger share of production costs than does the corn loan rate. Farmers moved land out of
corn and into soybeans in 1999 and 2000, opposite to the signal being given by comparative
Loan Maturity. The maturity date on marketing assistance loans is about 9 months
after the loans are made. In most cases, farmers who obtain commodity loans do so shortly
after harvest. Therefore, a 9-month term means that the loans generally will be settled
during the same marketing year in which the crop was harvested. This encourages farmers to
market their crops rather than carry them forward into the next marketing year.
One proposal (H.R.
4979) would extend the maturity date on commodity loans to 20 months, another (S. 1635) would set the
term at 36 months. The argument for a longer loan term is to make it easier for farmers to
hold commodities off the market when prices are low in anticipation of higher prices in
the next marketing year. Opponents contend that carrying inventories into the next
marketing year would generate high storage costs, add to the total supply, create a burden
on storage capacity, adversely impact on the end use quality of the crop, and serve to
depress prices for at least another year. Additionally, the opponents assert, if farmers
do want to speculate on a rise in prices, there are other vehicles available in the
commodity futures markets.
The Future. The problems that beset the marketing assistance loan program in
1999 persisted as farmers harvested their 2000 crops. Market prices remain low and the
marketing loan program continues to serve as a major safety net for farm income support.
In 1998, 1999, and 2000, Congress responded to low prices by disbursing arguably
non-distorting "market loss payments" in parallel with AMTA contract payments.
The $5.672 billion in 1998 crop contract payments were matched by market loss payments of
$2.811 billion (P.L.
105-277, Sec 1111). The $5.476 billion in 1999 crop contract payments were matched by
market loss payments of $5.466 billion (P.L. 106-78, Sec
802). And $5.049 billion in 2000 crop contract payments were matched with $5.466 billion
in market loss payments (P.L. 106-224,
Policymakers are uncomfortable with the recurring need for ad hoc farm income
assistance. In the 107th Congress, the focus will be on longer-term options
that likely will provide market driven counter cyclical assistance. Alternatives include
revenue insurance (already being pilot tested, see CRS Issue Brief
IB10033), tax deferred income stabilization accounts (H.R. 957, S. 642), counter cyclical
income support payments (H.R.
2792), and modifying the marketing assistance loan program. The likely vehicle for
modifications of farm policy will be an omnibus farm bill in 2002 to replace the expiring
1996 farm bill.
This report will be updated and revised as legislative events transpire.
Related References: The USDA's Farm Service Agency (which administers farm income and
commodity support programs) has program
fact sheets available at http://www.fsa.usda.gov/pas/aginfo.htm,
and marketing assistance loan and
LDP data at http://www.fsa.usda.gov/dafp/psd/Reports.htm.
1. (back) Title I (the Agricultural
Market Transition Act) of the Federal Agricultural Improvement and Reform Act of 1996
specifically contains the commodity provisions for the seven crop years 1996 through 2002.
See CRS Report RS20271, Support Programs for Major Crops:
Description and Experience.
2. (back) Data are from the Economic
Research Service, as of September 9, 2000.
3. (back) In general, to be eligible
for nonrecourse marketing assistance loans and LDPs for wheat, feed grains, upland cotton,
and rice, producer must have contract acreage for at least one of the commodities. For the
2000 crop only, the Agricultural Risk Protection Act of 2000 authorized LDPs to producers
with no contract acreage (P.L. 106-224,
Sec 206). No contract requirement has ever applied to soybeans and other oilseeds.
4. (back) The rate of interest on
commodity loans (set at 7.125% for December 2000) is the CCC cost of borrowing from the
U.S. Treasury plus 1%.
5. (back) The loan rate formula is
85% of the moving average of market prices received by farmers over the past five years,
dropping the highest and lowest price years. The USDA has limited authority to reduce loan
rates below the formula to encourage marketing, but may not raise them.
6. (back) Extra long staple (ELS)
cotton is eligible for nonrecourse loans but is not eligible for alternative marketing
loan repayment or for loan deficiency payment provisions.
7. (back) The Agriculture Risk
Protection Act of 2000 (P.L. 106-224)
authorized payments in lieu of LDPs to producers of 2001 crop wheat, barley, or oats who
elect to graze the acreage.
8. (back) Removal of the loan caps
and extending the term of loans were defeated by Senate vote during the second session of
the 105th Congress (S.Amdt. 3146).
However, supporters continued to encourage these changes in the 106th Congress.