Agricultural Credit: Institutions and Issues

Jim Monke
Specialist in Agricultural Policy

The federal government has long provided credit assistance to farmers, in response to insufficient lending in rural areas or a desire for targeted lending to disadvantaged groups. One federal lender is the Farm Service Agency (FSA) in the U.S. Department of Agriculture (USDA). It issues direct loans to farmers who cannot qualify for regular credit, and guarantees repayment of loans made by other lenders. Thus, FSA is called a lender of last resort. Of about $240 billion in total farm debt, FSA provides about 2% through direct loans, and guarantees about another 4% of loans. Another federally related lender is the Farm Credit System (FCS), a cooperatively owned, federally chartered lender with a statutory mandate to serve agriculture-related borrowers. FCS makes loans to creditworthy farmers, and is not a lender of last resort. FCS accounts for about 39% of farm debt. Commercial banks are the largest farm lender and hold 44% of total farm debt.

While the global financial crisis that escalated in 2008 was slower to affect agricultural balance sheets than the housing market, it has begun to take its toll. Net farm income fell by 35% in 2009, reducing some farmers' ability to repay loans—particularly among dairy, hog, and poultry farms. Delinquency rates (loans that are more than 30 days past due) on residential mortgages began to rise in 2005, but delinquency rates for agricultural loans did not begin to rise until mid-2008 and have not risen as quickly. The delinquency rate on residential mortgages was 11.3% in March 2010; it reached 3.1% for agricultural loans in December 2009, and was 2.89% in March 2010.

Because of the financial turmoil, the USDA farm loan program has seen significantly higher demand. In FY2009, FSA had its highest loan authority since 1985, issuing $4.5 billion of loans and guarantees. Two supplemental appropriations added more than $1.1 billion to $3.4 billion of regularly appropriated loan authority. The regular FY2010 appropriation provided even more, $5.1 billion. A pending FY2010 supplemental appropriation (H.R. 4899) would add $950 million of additional loan authority, for a possible total loan authority of $6 billion.

Term limits have been part of the USDA farm loan program since the financial crisis of the 1980s. They encourage farmers to graduate to commercial loans by placing a maximum number of years that farmers are eligible. However, Congress has suspended application of the guaranteed operating loan term limit to prevent some farmers from being denied credit. USDA says that 3,800 current borrowers have reached the limit and would not qualify if the term limit was not suspended. The 2008 farm bill renewed the suspension of this term limit, but only through 2010. In the Senate, S. 3221 would extend the suspension of term limits for two more years, until December 31, 2012. This would allow the issue to wait to be addressed in the next farm bill.

Also because of the financial crisis and debt repayment problems, farmers' use of mediation services has increased. USDA has a grant program that provides matching funds through the states to mediators. The $4 million program is authorized through FY2010. House-passed H.R. 3509 would reauthorize the program through FY2015, as would Senate-introduced S. 1375.

Finally, FCS is seeking to expand its authority through a broader list of permissible investments. The 2008 farm bill did not expand FCS's lending authority, but a proposed rule would allow FCS to "invest" through bonds or other assets to finance certain rural infrastructure, housing facilities, and rural business investment companies. Under statute, FCS cannot be a lender to these nonfarm entities. Disposition of the proposed rule awaits action by the Farm Credit Administration (FCA), the federal regulator. FCA's 2010 regulatory agenda listed the rule as "undetermined" and did not anticipate a decision. Congress does not have a role in this regulatory approval process.


Date of Report: July 14, 2010
Number of Pages: 21
Order Number: RS21977
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Previewing Dairy Policy Options for the Next Farm Bill

Dennis A. Shields
Specialist in Agricultural Policy

Financial stress in the dairy industry in 2009, brought on largely by sharply lower milk prices, activated standing federal programs to support dairy farmers. In calendar year 2009, the federal government spent more than $1 billion to support the industry through the Milk Income Loss Contract (MILC) Program, the Dairy Product Price Support Program (DPPSP), and the Dairy Export Incentive Program (DEIP). Following appeals from dairy farmers for more financial assistance, Congress granted another $350 million in October 2009 in the form of supplemental payments to dairy farmers and government purchases of dairy products.

While farm milk prices have increased since summer 2009, the financial stress seen throughout the year and similar previous episodes have led the industry and Congress to reconsider how to deal with fluctuations in milk prices and financial prospects for dairy farmers. Some Members have voiced interest in developing alternatives to current polices and incorporating them as part of the next omnibus farm bill in 2011-2012.

The dairy industry is currently developing or advocating a variety of policy changes in response to the difficult financial situation affecting dairy farmers beginning in late 2008. All of the proposals discussed in this report—loosely categorized as either supply management, marketbased, or tiered-pricing—have implications for U.S. dairy farmers, competitiveness of the U.S. dairy industry, and international trade.

Under supply management, H.R. 5288 and S. 3531 are designed to prevent depressed farm milk prices while reducing price volatility through supply management. The National Milk Producers Federation (NMPF) has also proposed a market stabilization component as part of its comprehensive package of suggested reforms to dairy policy. Supporters of price stabilization and supply management say that inherent incentives to overproduce need to be offset by a program to manage supplies in a measured way. Critics of supply management, including dairy processors, contend that such measures could reduce the competitiveness of the U.S. dairy industry, limit its incentive to innovate, and raise consumer prices, because, they argue, a pricing system based on supply control and/or cost of production potentially rewards inefficiency.

The market-based approach, including a separate element of the NMPF package, represents an opposing view on how the federal government should address the problem of farm milk price volatility and periodic financial stress for dairy farmers. This approach contends that, because it is difficult to manage milk supplies and prices administratively, the best approach is to provide a government program that helps farmers manage risk associated with volatile prices of milk and feed. Specifically, a new "safety net" would be established to protect a dairy farmer's "margin"— that is, the farm price of milk minus feed costs—regardless of current price levels. Critics expect that incentives to overproduce will aggravate the financial woes of the dairy industry indefinitely, and thus argue that controlling potential price variability and combating depressed farm prices with supply management is necessary for the long-term financial health of producers.

The third area of potential policy change is to alter the current pricing approach used in federal milk marketing orders (FMMOs) to directly increase dairy farm revenue. For example, one proposed change to base milk pricing in FMMOs on the cost of milk production (S. 1645) would imply higher prices received by dairy farmers. However, some are concerned that the long-run competitiveness and stability of the U.S. dairy industry could be at risk because of the unknown effectiveness of provisions to discourage overproduction.


Date of Report: July 7, 2010
Number of Pages: 22
Order Number: R41141
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FY2010 Supplemental Appropriations for Agriculture

Jim Monke
Specialist in Agricultural Policy

Two separate bills are advancing in the 111th Congress that could provide nearly $4 billion of supplemental funds for agricultural programs in FY2010. The agricultural provisions in these bills have a relatively small funding impact compared with the nonagricultural provisions in the bills.

H.R. 4213 (commonly known as the "tax extenders" bill) would provide up to $3.6 billion for agriculture-related programs. The House and Senate are trading amendments to reconcile differences between each chamber's version of the bill. The most recent House-passed version from May 28, 2010, includes $1.48 billion for agricultural disaster assistance, $1.15 billion for a settlement of the Pigford lawsuit against the U.S. Department of Agriculture (USDA), and $1.06 billion to extend tax provisions for biodiesel and conservation. The Senate-passed version from March 10, 2010, does not contain funding for the Pigford settlement, but does include the other provisions. Difficulty reaching agreement over the budget impact of the bill, and the need for offsets rather than emergency spending, may be jeopardizing the prospects that some of the agriculture provisions will remain in the bill.

H.R. 4899 (a supplemental appropriations bill for war spending and disaster response) would provide relatively smaller appropriations for other agricultural programs, as well as rescind prior appropriations from various agricultural accounts. The House and Senate are trading amendments to reconcile difference between each chamber's version of the bill. The most recent House-passed version from July 1, 2010, contains $1.4 billion for agriculture before rescissions, including $1.15 billion for the Pigford settlement (duplicated from H.R. 4213 because of procedural uncertainty), $150 million for international food aid (P.L. 480 Food for Peace), $50 million for food purchases in a domestic nutrition assistance program (The Emergency Food Assistance Program, TEFAP), $32 million for the farm loan program (to support an additional $950 million of loans), $18 million for emergency forest restoration, and additional authorities to raise fees for the Section 502 rural housing loan guarantee program. The Senate-passed version from May 27, 2010, contains $200 million for agriculture before rescissions, including identical provisions for the loan programs and forestry, but does not have the Pigford or TEFAP funding.

Rescissions from agriculture programs are significant in the most recent House-passed version of H.R. 4899, totaling $1.0 billion, and are much larger than in the Senate-passed bill. The House bill from July 1 would rescind $487 million from reserve funds for the Supplemental Nutrition Program for Women, Infants, and Children (WIC), $422 million from rural development (including $300 million of rural broadband funding), and $70 million from unobligated balances from the Natural Resources Conservation Service. Both the House and Senate bills would offset $50 million by limiting mandatory outlays for the Biomass Crop Assistance Program (BCAP).

Both H.R. 4213 and H.R. 4899 await further floor action to resolve differences between the chambers.


Date of Report: July 8, 2010
Number of Pages: 11
Order Number: R41255
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Farm Safety Net Programs: Issues for the Next Farm Bill

Dennis A. Shields
Specialist in Agricultural Policy

Jim Monke
Specialist in Agricultural Policy

Randy Schnepf
Specialist in Agricultural Policy

Roughly every five years, Congress debates and revises omnibus legislation governing federal farm policy. Commodity provisions in the 2008 farm bill (P.L. 110-246) expire in 2012, and Congress is currently reviewing U.S. farm policy. The collection of federal farm programs, which make payments to farmers and landlords, is often referred to by the broader farming community as the "farm safety net." Some programs such as "countercyclical payments" (which rise when crop prices decline) contain elements of a safety net—which is usually intended to protect recipients against economic risks. Other farm program payments, such as direct (fixed) payments, are made irrespective of market prices.

As provided under the 2008 farm bill and other legislation, farm safety net programs can be divided into three main categories. Commodity programs provide income support and attempt to address farm price or revenue risks for selected field crops. Risk management (primarily crop insurance) provides protection from declines in yield or revenue for a much broader set of commodities, including many field and specialty crops and some livestock. Supplemental disaster assistance is available for most agricultural commodities (crops and livestock) when weather related production losses are not covered by other programs.

Many policymakers and farmers consider federal support of farm businesses necessary for their financial survival, given the unpredictable nature of agricultural production and markets. In contrast, many environmental groups and budget hawks argue that farm subsidies encourage overproduction on environmentally fragile land and are a market-distorting use of tax dollars.

Historically, federal programs have primarily benefitted farmers (and landowners) of the major crops, such as wheat, corn, cotton, and sugar, with policy constructed over many decades by modifying or adding programs. As a result, programs sometimes overlap or work at cross purposes, generating criticism that they are not well integrated, cost too much, or do not provide adequate risk protection. Additional potential issues for Congress in the next farm bill debate include the extent of the current commodity coverage, program complexity and its impact on participation and effectiveness, and the effect of biofuel subsidies on agriculture.

The current federal budget situation is likely to prevent any increase in overall spending on a 2012 farm bill. Thus, the level of funding in the Congressional Budget Office (CBO) baseline budget for agricultural programs will be of paramount importance. Combined outlays for farm safety net programs have averaged $15.7 billion per year during FY2003 to FY2010, with a high of $20.5 billion in FY2006 and a low of $12.2 billion in FY2008. CBO's projected annual average for FY2011-FY2020 is $14.9 billion. With crop prices relatively high, counter-cyclical support has declined in recent years while crop insurance outlays (which are directly related to crop prices) have increased sharply. The pool of money for any changes to the farm safety net will likely come from the existing baseline for the commodity programs and the crop insurance program.

A constraint affecting future U.S. policy choices is the broad set of rules of the World Trade Organization (WTO), which the United States, as a founding member, has agreed to abide by. Farm bill proposals, if implemented, will affect U.S. commitments, mainly through cost, program design, implementation, and market effects. Under the WTO Agreement on Agriculture, the United States is committed to spending no more than $19.1 billion per year on "amber box" support (programs considered to be the most trade distorting). The WTO compatibility of any new proposal, such as a whole-farm safety net program, would depend on how its provisions mesh with WTO criteria for loss triggers, payment levels, and production and trade effects.


Date of Report: July 9, 2010
Number of Pages: 28
Order Number: R41317
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Brazil’s WTO Case Against the U.S. Cotton Program

Randy Schnepf
Specialist in Agricultural Policy

U.S. and Brazilian trade negotiators reached agreement on June 17, 2010, on a "Framework agreement" regarding a World Trade Organization (WTO) dispute settlement case over U.S. cotton subsidies and GSM-102 agricultural export credit guarantees. The Framework agreement—which lays out a number of "steps and discussions"—represents a path forward toward the ultimate goal of reaching a negotiated solution to the dispute, while avoiding WTO sanctioned trade retaliation by Brazil against U.S. goods and services. The Framework includes quarterly discussion on potential limits of trade-distorting U.S. cotton subsidies (recognizing that actual changes will not occur prior to the 2012 farm bill) and provides benchmarks for further changes to the GSM-102 program.

The so-called Brazil cotton case is a long-running WTO dispute settlement case (DS267) initiated by Brazil—a major cotton export competitor—in 2002 against specific provisions of the U.S. cotton program. In September 2004, a WTO dispute settlement panel found that certain U.S. agricultural support payments and guarantees—including (1) payments to cotton producers under the marketing loan and counter-cyclical programs, and (2) export credit guarantees under the GSM-102 program—were inconsistent with WTO commitments. In 2005, the United States made several changes to both its cotton and GSM-102 programs in an attempt to bring them into compliance with WTO recommendations. However, Brazil argued that the U.S. response was inadequate. A WTO compliance panel ruled against the United States in December 2007, and the ruling was upheld on appeal in June 2008.

In August 2009, a WTO arbitration panel—assigned to determine the appropriate level of retaliation—announced that Brazil's trade countermeasures against U.S. goods and services could include two components: (1) a fixed amount of $147.3 million for cotton payments, and (2) a variable amount based on GSM-102 program spending. The arbitrators also ruled that Brazil would be entitled to cross-retaliation if the overall retaliation amount exceeded a formula-based variable annual threshold. Cross-retaliation involves countermeasures in sectors outside of the trade in goods, most notably in the area of U.S. copyrights and patents.

Based on the arbitrators' formulas, using 2008 data, Brazil announced in December 2009 that it would impose trade retaliation against up to $829.3 million in U.S. goods, including $268.3 million in eligible cross-retaliatory countermeasures. In March 2010, Brazil released a list of 102 goods of U.S. origin that would be subject to import tariffs of up to 100%, followed by a preliminary list of U.S. patents and intellectual property rights that it could restrict. Brazil announced an April 6 deadline for imposing the tariffs, which led to intense negotiations between Brazil and the United States to find a mutual agreement and avoid the trade retaliation.

In early April, 2010, the United States offered a three-point proposal including establishment of a $147.3 million annual fund to provide technical assistance and capacity-building for Brazil's cotton sector, near-term modifications to the operation of the GSM-102 program, and special recognition for certain Brazilian beef imports into the United States. As a result, Brazil agreed to postpone the implementation of countermeasures until April 22. On April 20, the two parties signed a memorandum of understanding (MOU) that detailed the specifics of the $147.3 million fund. As a result, Brazil extended the suspension of trade retaliation until mid-June. The aforementioned "Framework agreement" is intended to delay any trade retaliation until after the 2012 farm bill, when potential changes to U.S. domestic cotton subsidies will be evaluated.


Date of Report: June 30, 2010
Number of Pages: 41
Order Number: RL32571
Price: $29.95

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Previewing Dairy Policy Options for the Next Farm Bill

Dennis A. Shields
Specialist in Agricultural Policy

Financial stress in the dairy industry in 2009, brought on largely by sharply lower milk prices, activated standing federal programs to support dairy farmers. In calendar year 2009, the federal government spent more than $1 billion to support the industry through the Milk Income Loss Contract (MILC) Program, the Dairy Product Price Support Program (DPPSP), and the Dairy Export Incentive Program (DEIP). Following appeals from dairy farmers for more financial assistance, Congress granted another $350 million in October 2009 in the form of supplemental payments to dairy farmers and government purchases of dairy products.

While farm milk prices have increased since summer 2009, the financial stress seen throughout the year and similar previous episodes have led the industry and Congress to reconsider how to deal with fluctuations in milk prices and financial prospects for dairy farmers. Some Members have voiced interest in developing alternatives to current polices and incorporating them as part of the next omnibus farm bill in 2011-2012.

The dairy industry is currently developing or advocating a variety of policy changes in response to the difficult financial situation affecting dairy farmers beginning in late 2008. All of the proposals discussed in this report—loosely categorized as either supply management, marketbased, or tiered-pricing—have implications for U.S. dairy farmers, competitiveness of the U.S. dairy industry, and international trade.

Under supply management, H.R. 5288 (introduced May 12, 2010) is designed to prevent depressed farm milk prices while reducing price volatility through supply management. The National Milk Producers Federation (NMPF) has also proposed a market stabilization component as part of its comprehensive package of suggested reforms to dairy policy. Supporters of price stabilization and supply management say that inherent incentives to overproduce need to be offset by a program to manage supplies in a measured way. Critics of supply management, including dairy processors, contend that such measures could reduce the competitiveness of the U.S. dairy industry, limit its incentive to innovate, and raise consumer prices, because, they argue, a pricing system based on supply control and/or cost of production potentially rewards inefficiency.

The market-based approach, including a separate element of the NMPF package, represents an opposing view on how the federal government should address the problem of farm milk price volatility and periodic financial stress for dairy farmers. This approach contends that, because it is difficult to manage milk supplies and prices administratively, the best approach is to provide a government program that helps farmers manage risk associated with volatile prices of milk and feed. Specifically, a new "safety net" would be established to protect a dairy farmer's "margin"— that is, the farm price of milk minus feed costs—regardless of current price levels. Critics expect that incentives to overproduce will aggravate the financial woes of the dairy industry indefinitely, and thus argue that controlling potential price variability and combating depressed farm prices with supply management is necessary for the long-term financial health of producers.

The third area of potential policy change is to alter the current pricing approach used in federal milk marketing orders (FMMOs) to directly increase dairy farm revenue. For example, one proposed change to base milk pricing in FMMOs on the cost of milk production (S. 1645) would imply higher prices received by dairy farmers. However, some are concerned that the long-run competitiveness and stability of the U.S. dairy industry could be at risk because of the unknown effectiveness of provisions to discourage overproduction.


Date of Report: June 28, 2010
Number of Pages: 21
Order Number: R41141
Price: $29.95

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Brazil’s WTO Case Against the U.S. Cotton Program

Randy Schnepf
Specialist in Agricultural Policy

U.S. and Brazilian trade negotiators reached agreement on June 17, 2010, on a "Framework agreement" regarding a World Trade Organization (WTO) dispute settlement case over U.S. cotton subsidies and GSM-102 agricultural export credit guarantees. The Framework agreement—which lays out a number of "steps and discussions"—represents a path forward toward the ultimate goal of reaching a negotiated solution to the dispute, while avoiding WTOsanctioned trade retaliation by Brazil against U.S. goods and services. The Framework includes quarterly discussion on potential limits of trade-distorting U.S. cotton subsidies (recognizing that actual changes will not occur prior to the 2012 farm bill) and provides benchmarks for further changes to the GSM-102 program. The Framework agreement was formally accepted by Brazil's Foreign Trade Council of Ministers (CAMEX) on June 17, 2010.

The so-called Brazil cotton case is a long-running WTO dispute settlement case (DS267) initiated by Brazil—a major cotton export competitor—in 2002 against specific provisions of the U.S. cotton program. In September 2004, a WTO dispute settlement panel found that certain U.S. agricultural support payments and guarantees—including (1) payments to cotton producers under the marketing loan and counter-cyclical programs, and (2) export credit guarantees under the GSM-102 program—were inconsistent with WTO commitments. In 2005, the United States made several changes to both its cotton and GSM-102 programs in an attempt to bring them into compliance with WTO recommendations. However, Brazil argued that the U.S. response was inadequate. A WTO compliance panel ruled against the United States in December 2007, and the ruling was upheld on appeal in June 2008.

In August 2009, a WTO arbitration panel—assigned to determine the appropriate level of retaliation—announced that Brazil's trade countermeasures against U.S. goods and services could include two components: (1) a fixed amount of $147.3 million for cotton payments, and (2) a variable amount based on GSM-102 program spending. The arbitrators also ruled that Brazil would be entitled to cross-retaliation if the overall retaliation amount exceeded a formula-based variable annual threshold. Cross-retaliation involves countermeasures in sectors outside of the trade in goods, most notably in the area of U.S. copyrights and patents.

Based on the arbitrators' formulas, using 2008 data, Brazil announced in December 2009 that it would impose trade retaliation against up to $829.3 million in U.S. goods, including $268.3 million in eligible cross-retaliatory countermeasures. In March 2010, Brazil released a list of 102 goods of U.S. origin that would be subject to import tariffs of up to 100%, followed by a preliminary list of U.S. patents and intellectual property rights that it could restrict. Brazil announced an April 6 deadline for imposing the tariffs, which led to intense negotiations between Brazil and the United States to find a mutual agreement and avoid the trade retaliation.

In early April, 2010, the United States offered a three-point proposal including establishment of a $147.3 million annual fund to provide technical assistance and capacity-building for Brazil's cotton sector, near-term modifications to the operation of the GSM-102 program, and special recognition for certain Brazilian beef imports into the United States. As a result, Brazil agreed to postpone the implementation of countermeasures until April 22. On April 20, the two parties signed a memorandum of understanding (MOU) that detailed the specifics of the $147.3 million fund. As a result, Brazil extended the suspension of trade retaliation until mid-June. The aforementioned "Framework agreement" is intended to delay any trade retaliation until after the 2012 farm bill, when potential changes to U.S. domestic cotton subsidies will be evaluated.


Date of Report: June 22, 2010
Number of Pages: 41
Order Number: RL32571
Price: $29.95

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Agriculture-Based Biofuels: Overview and Emerging Issues

Randy Schnepf
Specialist in Agricultural Policy

Since the late 1970s, U.S. policymakers at both the federal and state levels have enacted a variety of incentives, regulations, and programs to encourage the production and use of agriculture-based biofuels. Initially, federal biofuels policies were developed to help kick-start the biofuels industry during its early development, when neither production capacity nor a market for the finished product was widely available. Federal policy has played a key role in helping to close the price gap between biofuels and cheaper petroleum fuels. Now, as the industry has evolved, other policy goals (e.g., national energy security, climate change concerns, support for rural economies) are cited by proponents as justification for continuing policy support.

The U.S. biofuels sector has responded to these government incentives by expanding output every year since 1996, with important implications for the domestic and international food and fuel sectors. The production of ethanol (the primary biofuel produced in the United States) has risen from about 175 million gallons in 1980 to 10.7 billion gallons per year in 2009. U.S. biodiesel production is much smaller than its ethanol counterpart, but has also shown strong growth, rising from 0.5 million gallons in 1999 to an estimated 776 million gallons in 2008 before being impeded by the nationwide financial crisis.

Despite this rapid growth, total agriculture-based biofuels production accounted for only about 4.3% of total U.S. transportation fuel consumption in 2009. Federal biofuels policies have had costs, including unintended market and environmental consequences and large federal outlays (estimated at $6 to $8 billion in 2009). Despite the direct and indirect costs of federal biofuels policy and the small role of biofuels as an energy source, the U.S. biofuels sector continues to push for greater federal involvement. But critics of federal policy intervention in the biofuels sector have also emerged.

Current issues and policy developments related to the U.S. biofuels sector that are of interest to Congress include the following:

• Many federal biofuels policies (e.g., tax credits and import tariffs) require routine congressional monitoring and occasional reconsideration in the form of reauthorization or new appropriations funding.

• The 10% ethanol-to-gasoline blend ratio—known as the "blend wall"—poses a barrier to expansion of ethanol use. The Environmental Protection Agency (EPA) is currently evaluating the viability of raising the ethanol blending limit (per gallon of gasoline) for standard engines from 10% to 15%, which would have important market and policy implications.

• The evolution of EPA's methodology for estimating lifecycle greenhouse gas emission reductions of different biofuels production paths (relative to their petroleum counterparts) and the treatment of indirect land use changes will determine which biofuels qualify under the Renewable Fuel Standard.

• The slow development of cellulosic biofuels has raised concerns about the industry's ability to meet large federal usage mandates, which, in turn, has raised the potential for future EPA waivers of mandated biofuel volumes and has contributed to a cycle of slow investment in and development of the sector.


Date of Report: June 22, 2010
Number of Pages: 34
Order Number: R41282
Price: $29.95

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