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Wednesday, August 4, 2010

Measuring Equity in Farm Support Levels

Randy Schnepf
Specialist in Agricultural Policy

Federal farm law mandates support for, among others, 21 "covered commodities." Support for these agricultural commodities, as specified in the 2008 farm bill (P.L. 110-246) includes direct payments, counter-cyclical payments, and marketing loan benefits. Since 1996 a handful of these program commodities—feed grains (corn, sorghum, barley, and oats), cotton, wheat, rice, soybeans, and peanuts (hereafter referred to as the major program crops)—have received over $160 billion or 72% of all U.S. farm program payments, primarily in the form of commodity price and income support benefits.

Large disparities in the relative levels of benefit among these commodities have led to questions of equity. This report looks at available data for the major program crops and compares support rates per unit, total payments, payments per harvested acre, payments as a share of the value of production, and payments as a share of the total cost of production. In addition, price and income support levels are compared to market prices. By all of these measures there has been little equity across commodities. However, farmers often have argued for equity based on cost of production. Economists, on the other hand, would use trend (or a moving average of) market prices as the basis for setting support prices in order to avoid market distortions and resource misallocations.

There is little or no practical or theoretical justification for equalizing support rates, total payments, or payments per harvested acre. In fact, some critics say the subsidies themselves are not justified. However, to the extent that farm support is a political reality, equity is a consideration. There are times when market prices drop substantially, but temporarily, below trend levels. At these times support may be justified to prevent unnecessary and undesirable resource adjustments. This builds on the concept of a market-based "safety net" that uses market price trends as the key factor in setting support levels.

During the past 13 years (1997-2009), monthly average market prices for the major "covered commodities" have been below loan rates 30% of the time, and below effective target prices 58% of the time. However, this frequency has varied substantially across crops. This report calculates adjustments to policy parameters that would put each of the commodities "in the money" an arbitrary 30% of the time with regard to the price guarantee inherent in marketing loans, and an arbitrary 50% of the time with regard to adjusted target prices used by the counter-cyclical payments program.

Compared to market price trends from 1997 through 2009, upland cotton and rice have disproportionately high effective target prices and marketing loan rates relative to the other major covered commodities. Barley and soybeans have disproportionately lower adjusted target prices and marketing loan rates. The situation is mixed for most of the other crops; however, wheat, corn, sorghum, and oats are within +/-5% of the parity value for both loan rates and target prices, suggesting that they are the closest to achieving policy equity under this somewhat ad hoc analysis.

Date of Report: July 20, 2010
Number of Pages: 22
Order Number: RL34053
Price: $29.95

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