Chapter 3: Agricultural Programs
In most years, U.S. farmers produce surpluses in many crops. In order to guarantee adequate levels of production while ensuring a stable economic return to growers, a complex set of Federal farm policies and programs has evolved. Major efforts to manage agricultural production and to support prices for agricultural commodities were initiated in the 1930s and continue up to the present. While various policies have been employed since the 1930s to influence agricultural conditions, in general Federal farm programs attempt to stabilize farm income through direct payments to farmers and price supports for crops. To control the cost of the income and price support programs, the Government attempts to increase market prices by restricting the production of surplus crops through acreage restrictions, allotments, set-asides or paid diversions. In recent decades, agricultural policies have been set forth in a series of farm bills establishing multi-year programs for agriculture.1
The National Wetland Status and Trends Analysis found that 54 percent of the 2.6 million acres of wetlands lost between the mid-1970s and the mid-1980s had been converted to agricultural purposes (Dahl 1991). Historically, the economic incentives embodied in agricultural statutes have influenced wetland decline by increasing the profitability while reducing the risks of agriculture. These economic incentives both magnified the gains to be derived from converting wetlands to croplands and led to increased degradation of wetlands by chemical and sediment loadings from agricultural runoff. Legislative reforms in 1985 and 1990 have made it much more difficult for new acreage to qualify for price and income supports, and have established severe penalties in many instances for converting wetlands to cropland. These changes have significantly diminished the incentives in Federal agricultural law to convert wetlands to cropland.
The principal tools used to effect Federal farm policy have been: (1) price supports in the form of nonrecourse loans for about a dozen surplus commodities including feed grains, wheat, cotton, rice, tobacco, peanuts, and others; (2) deficiency payments to support farm income; and (3) acreage set-aside, acreage reduction, or paid land diversion programs to manage levels of crop production. Program crops are not always eligible for both price supports and deficiency payments;2 the eligibility varies from year to year, generally at the discretion of the Secretary of Agriculture and within the context of existing farm legislation.
Price Supports: Crop prices are supported by loan programs. The Federal Government establishes a loan rate for a program crop.3 Using their crops as collateral, participating growers are able to obtain cash from Government loans at the established loan rates. The program provides an incentive for growers to place their crops in storage, and facilitates orderly marketing throughout the season. If the market price rises above the loan rate, the grower can sell the crop, repaying the loan, interest, and storage costs. If the market price falls below the loan rate, the grower can either forfeit his crop to the Government as payment-in-full for the loan, or redeem the loan at the market price for the commodity.4 Thus, these "nonrecourse" loans guarantee a minimum revenue to farmers for commodities.
Deficiency Payments: The key method used to directly support income involves setting target prices for some program crops. The target prices are intended to approximate the minimum price needed for growers to cover the cost of production. If the market price drops below the target price for a specified period of time, growers participating in the program are eligible to receive "deficiency" payments from the Federal Government to make up the difference between the target price and the lower selling price.5 By law, no recipient may receive more than $50,000 annually in deficiency payments. However, through a variety of methods, some growers have successfully reorganized their businesses into multiple entities to avoid this restriction.6
NOTE: If this table does not appear as a table, please click on this link to view it as a graphic file.
Table III-1 (5Kb gif)
Loans and payments under these programs are financed through the Commodity Credit Corporation, a corporation wholly owned by the Federal Government and operating within the Department of Agriculture (USDA). The Corporation has an authorized capital stock of $100 million and authority to borrow up to $30 billion from the U.S. Treasury. The Agricultural Stabilization and Conservation Service (ASCS) provides operating personnel for the Corporation and administers the commodity programs. Federal outlays for these programs increased significantly during the mid-1980s, but have declined since then.
Historically, price and income supports have provided an economic incentive for the cultivation of greater acreage than the market would have demanded in the absence of the programs. By reducing income variability and risk while increasing expected returns, farm subsidies prompted agricultural producers to convert wetlands to cropland and to cultivate marginal land that would otherwise be retired and perhaps revert to wetlands. These programs were noted in at least eight of the study areas, the areas reporting wetland losses associated with agriculture.
Supply Management, Base Acreage, and Acreage Allotments: A grower is not at liberty to enroll an unlimited amount of acreage in the commodity programs. Clearly, that would defeat the principal purpose of the programs. Based on its planting history, each farm has been assigned a "base acreage" for programmatic purposes. A farm's "base" constitutes the acreage eligible for participation in farm programs. Base is commodity specific, i.e., there is a base for corn, for wheat, etc. A grower can increase his base, but only by dropping out of the commodity programs for a period of time and developing a planting history on additional acreage.
In most years, anticipated market conditions result in USDA requiring participating growers to plant less than their base, devoting 50 percent of the reduction to a planted cover crop. Each year the Department of Agriculture estimates the supply of each program crop needed to satisfy demand at target prices. Based on these forecasts, USDA sets a national acreage reduction level for each program crop, i.e., the percentage of each farm's base acreage which must be put in the acreage reduction program.
As indicated above, a farm operator can increase his base, but statutory changes in 1985 and 1990 have made it much more difficult for a grower to do this. For example, prior to 1985, a grower could add to his corn base by dropping out of the corn program for a year and planting additional corn acreage. The additional corn acreage became a part of his corn base.7 Under the 1985 Food Security Act (FSA), however, base was calculated by averaging the acreage planted to a crop over the preceding five years. Thus, if a grower left the corn program in 1986 and planted an additional 100 acres of corn, his corn base increased by only 20 acres in 1987. It would take him an additional four years (until 1991) to qualify all 100 acres as part of his corn base, and during this 5-year period he could not participate in the corn program. The Food, Agriculture, Conservation, and Trade Act of 1990 (FACTA) added the further constraint that an operator could not participate in any commodity program during the period when he was adding to his base. Thus, under FACTA if our hypothetical grower wants to increase his corn base by 100 acres, he must withdraw from all commodity programs for five years, a potentially significant cost.
Despite these statutory changes, opportunities remain for farmers to build base without foregoing programmatic benefits. An individual receiving program benefits under his name can create another entity -- a corporation or partnership -- that could build base while the producer continued to receive payments as an individual. The producer would not have to drop out of the commodity programs, and could continue to receive USDA price and income-support benefits, while the newly created entity was building crop base in preparation for it to receive program benefits, as well. Approximately 30 percent of farms restructure each year, although not necessarily to develop new base.
Implications for Wetland Conversion: These changes in the statutory procedures for increasing base acreage significantly decrease the incentive in the commodity programs for developing new arable land. As a result, they have implications for wetland conversion.
Historically, a grower could drain an area and, after meeting the required cropping history in the drained area, add the new cropland to his farm's base. Once included in the base, the converted wetland could either be cropped or used to meet set-aside or diverted acreage requirements, whichever was most advantageous to the grower. The grower was permitted to keep the most productive land in production, using his least productive land to satisfy any set-aside requirements. The use of marginal cropland in this fashion has been a common practice throughout the country. Among the regions examined by the Department, it was cited as a frequent practice in the California Central Valley and the Nebraska Rainwater Basin. The 1985 and 1990 farm bills made it more difficult to add to base, however, and although it can still be done, it takes longer and is more costly. Thus, the programmatic incentives to convert wetlands for this purpose have been significantly and systematically diminished.
Yield: A farm operator's deficiency payments are based on "program yields" per acre rather than on the yields realized by the operator. Program yields are based in part on a farm's historical performance and in part on actual production levels in the locality of the farm. In order to help control budgetary costs, program yields were frozen in the 1985 FSA at the 1986 level. This further restricted the programmatic incentives to convert wetlands to farmland.8
The Swampbuster provisions of the Food Security Act of 1985 (FSA) and the Food, Agriculture, Conservation, and Trade Act of 1990 (FACTA) eliminate the historic, detrimental effect of the commodity programs and a number of other farm programs on wetlands. (FACTA amends the Swampbuster provisions in the FSA.) Swampbuster reduces the incentives to convert wetlands to croplands by denying eligibility for almost all farm program benefits on all acres operated by a grower who either converts a wetland or plants on a converted wetland.10 The ineligibility for benefits applies not only on the converted wetland but on all lands in which the operator has at least a 20 percent interest during the crop year. In addition to price and income supports, violators are also ineligible for insured or guaranteed loans, disaster relief, crop insurance, conservation and environmental easement payments, and participation in small watershed protection and flood prevention projects. A violator can regain eligibility for future farm program benefits by restoring the converted wetland to its original condition.
Several aspects of the original (1985) Swampbuster provisions weakened their potential effectiveness:
- First, Swampbuster did not prohibit conversion; it only eliminated eligibility for some key Federal economic benefits.
- Second, Swampbuster was triggered only when crops were planted on converted wetlands. Wetlands still could be converted for roads, buildings, or storage areas, and the grower remained eligible for farm program benefits.
- Third, Swampbuster applied only to annual crops and sugarcane, but not to perennial crops. A grower could convert a wetland for alfalfa, pasture grasses, or fruit or nut trees, and still receive farm program benefits. For example, the conversion of a wetland in California into a nut orchard would not trigger Swampbuster. Further, although the Act said that Swampbuster applied to sugarcane, the particular subsidies extended to growers of sugarcane were not among the Act's sanctions. (For a thorough discussion see chapter 7 on the Florida Everglades.)
- Fourth, the statute provided an exemption for "artificial wetlands."11 In most areas the proportion of artificial wetlands is small, and the statutory exemption for artificial wetlands was of no real consequence. But in the Central Valley of California, the exemption rendered Swampbuster completely ineffectual, and left almost all the remaining wetlands vulnerable to conversion without sanction. (See chapter 11, California's Central Valley.)
- Finally, those applying for farm program benefits had to certify that they would not crop a converted wetland during the year in which they were applying for program benefits. Because the determination was made annually, it allowed growers to convert a wetland; crop it in good years when they chose not to participate in the commodity programs; and then, in years when the market was weak and the subsidy programs looked more attractive, simply not plant on the wetland to qualify for benefits.
As originally enacted, Swampbuster contained no provision for scaling penalties according to the severity of the violation. There was only one penalty: loss of eligibility for program benefits. FACTA corrects this, and provides for graduated penalties. Further, under FACTA, Swampbuster violators who convert wetlands inadvertently may receive only a partial penalty, provided they agree to restore the wetlands within one year. An operator may invoke the inadvertent-conversion/partial-penalty provision only once every 10 years, however.
Because the commodity programs constitute the major source of benefits for most farmers, Swampbuster will have its greatest impact where commodity program participation is high. Its effect will be limited where growers of program crops tend not to participate in commodity programs or where non-program crops predominate.13 It is also possible that in the near future the attractiveness of participating in the commodity programs will diminish, because statutory benefit levels are scheduled to decline and continuing budget deficits generate interest in restricting the subsidies. Although the effectiveness of Swampbuster will be diminished if commodity program benefits are reduced, there are other program benefits which are denied to Swampbuster violators.14 Thus, Swampbuster would continue to deter wetland conversion, though at a reduced rate.
Sugar Price Supports
Subsidizing sugar through import restrictions, guaranteed prices, and nonrecourse loans has increased sugar prices and caused more land to be brought into production. Much of the additional acreage is converted wetlands, and much of it is in Florida's Everglades. Federal flood control and drainage projects make conversion of the land feasible, and protect the converted areas following agricultural development. Sugarcane production is a major cause of deterioration in water quality. Swampbuster is completely ineffective in discouraging wetland conversion to sugarcane, because price supports are paid to the processors of cane, although they must be passed on fully to the growers.
The Federal Government has been involved in the sugar industry since the 1800s. It has imposed a series of tariffs and enacted a number of statutes that, among other things, impose quotas on imports in order to protect domestic producers. During the decade mid-1970s to mid-1980s, the domestic sugar industry faced declining domestic consumption, due in large part to the growing use of low-calorie sweeteners and less costly corn sweeteners. It also faced a world surplus and widely fluctuating world prices. To counteract these downward pressures on sugar prices, the 1985 Food Security Act set the guaranteed price (to growers) for domestic sugarcane at 18 cents per pound, triple the world rate. The Act also reduced competition by restricting the amount of sugar that can be imported. To partially compensate the 39 countries whose sugar quotas were cut by the 1985 Act, the U.S. made available surplus foods worth $188.3 million.
Most of the subsidy to sugar is financed by U.S. consumers, who pay an estimated additional $3 billion each year for sugar; the rest, by taxpayers. There is a duty on sugar, but most imports are exempt under the Generalized System of Preferences and Caribbean Basin Initiative.
To ensure that domestic processors will buy the costly domestic cane, sugar processors who agree to pay growers the target price ($.18/lb.) receive low-interest, nonrecourse loans (price supports). The processed sugar serves as collateral for the loan. Should sugar become available on the market at lower prices, the processors can default on the loans without penalty, and the Government would acquire the more expensive sugar. This nonrecourse loan program protects the processors who can sell the sugar for a profit if prices rise, or forfeit the less valuable sugar if prices fall. The import restrictions keep prices above the loan rate, thereby discouraging forfeitures and any need for additional subsidy payments by the Treasury.
Because of Government price supports and expanding sugar production, the United States is becoming self-sufficient in sugar for the first time in its history. Unfortunately, this is being achieved at substantial cost to taxpayers, consumers, exporting nations, and the environment. In the 1990 FACTA legislation, provisions were added to control this increase in domestic production of sugarcane and sugar beets, the motivation being to ensure against massive loan forfeitures while retaining the high loan rate (price support). Marketing allotments, restricting the quantity of sugar a processor could sell domestically will be instituted whenever imports fall below a specified level.
One problem that farmers face when converting wetlands is the risk of crop losses due to flooding or drought. Farming on converted wetlands vulnerable to flooding or lands that no longer hold moisture due to drainage can prove hazardous. Between 1948 and 1986, flooding and excess moisture accounted for 19.6 percent of crop losses while drought accounted for 51.2 percent. Any reduction in the financial losses from such hazards will make wetland conversion more attractive. Disaster relief and subsidized crop insurance can add to the incentive to convert wetlands, because these programs lessen the economic risk of farming converted wetlands. Further, insurance of this nature makes it easier for growers to obtain credit to expand operations. Although disaster relief and crop insurance have been identified as forces which contributed to wetland loss in the past, Swampbuster denies these benefits to those who convert or plant on converted wetlands.
From 1974-1980, the Disaster Payments Program served as a form of free Federal crop insurance to growers of program crops. If a natural disaster destroyed or prevented planting of some portion of a grower's normal crops, the Disaster Payments Program paid 50 percent of the commodity target price for any shortfall between actual production and 60 percent of expected production. This program was suppose to be phased out and replaced with Federal crop insurance. However, Congress has continued to provide ad hoc disaster payments in addition to crop insurance.
Federal crop insurance, established in 1938, operated as a pilot program for four decades, but was greatly expanded in 1980 to replace disaster payments as the key protection against crop failure. Under the crop insurance program, growers must assume a portion of the cost of insuring themselves against disaster. To attract participants, the Federal Government pays for all administrative costs of the insurance program and 30 percent of a grower's insurance premium. This amounts to a subsidy of more than 50 percent of the cost of the insurance program. The grower can choose among three levels of yield protection. Surprisingly, premiums do not always rise as the level of protection increases.
Federal crop insurance is financed by the Federal Crop Insurance Corporation (FCIC), a wholly-owned Government corporation within the Department of Agriculture. The FCIC gets its funds from an initial capitalization of $500 million and from the sale of insurance. Because of catastrophic crop losses in 1983, 1984, and 1985, the Corporation exhausted its capital and is borrowing as needed, primarily from the Commodity Credit Corporation, to pay excess indemnities.15 Legislative proposals that would change how the Corporation funds its operations are under consideration. In 1986, crop insurance was available in over 3000 counties with policies covering 41 different commodities. Insurance coverage was about $4.9 billion in 1984, and rose to $9.8 billion in 1989.
Farm Credit, Low Interest Loans, and Federal Guarantees
The Federal Government has had a history of extending credit to farm operators at below market rates through a variety of programs. Efforts have been made in recent years to curtail the Federal involvement in the provision of farm credit. Generally, these efforts have taken the form of attempting to restrict the Government to its traditional role as the lender of last resort, and providing Federal guarantees to private lenders so that they will make loans instead of the Federal Government. Unfortunately, it is not clear that these efforts have been successful or that Federal credit subsidies have diminished.
As of August 1993, the Government, through the Farmers' Home Administration (FmHA), was one of the largest lenders of farm operating loans, holding more than $17 billion (12 percent) of all U.S. farm debt, with more than $4.4 billion of this debt being delinquent payments owed by more than 19,800 farm borrowers.16 More than a quarter of FmHA's portfolio was classified as delinquent.
The relatively low interests rates and increased availability of credit have reduced the costs to agricultural producers of expanding their operations (in some cases by draining and converting wetlands), and have sustained marginal farmers (in some cases in flood-prone and wet areas which might otherwise have reverted to wetlands). Swampbuster could halt much of the lending that affects wetlands if it were applied more effectively.
Farmers Home Administration
The FmHA makes farm ownership and operating loans available either directly or through guarantees with private lenders to farms which are "not larger than family-sized." In its capacity as a lender, FmHA makes loans to family farmers with limited resources at below market rates of interest. The FmHA is designed to be a lender of last resort, and borrowers are supposed to demonstrate that they cannot obtain credit elsewhere at terms and interest rates normally charged to farmers. Ownership and operating loans are made to limited resource applicants at not more than 50 percent of the prevailing market rates, subject to a minimum rate of 5 percent. In 1993, total FmHA farm borrowers numbered just under 175,000, or 8 percent of the 2.17 million farmers in the United States. FmHA's direct farm loan portfolio was over $17 billion.
In its capacity as a guarantor, FmHA provides guarantees of up to 90 percent for commercial loans supplied to eligible borrowers. The guarantees are a form of subsidy since they reduce the lender's risk of default.17 FmHA routinely subordinates its financial interests to assist borrowers in obtaining commercial credit. As a result, commercial lenders hold the senior rights to collateral and secured property, and Federal loan security is lessened.
In addition to farm ownership and operating loans, the FmHA provides disaster emergency loans to family farmers. The availability of such loans reduces the risk of farming in hazardous areas, such as flood-prone areas. These emergency loans assist victims of natural disasters in returning their farming operations to a financially sound basis, and hence, facilitate securing private sources of credit sooner. The loans may be used for expenses such as replacing damaged property, covering operating expenses, or in some cases, refinancing secured or unsecured debts incurred because of the disaster.
The 1985 Food Security Act stipulates that borrowers are not eligible for emergency loans unless they have Federal Crop Insurance. This condition is routinely waived in disaster relief legislation which supplements crop insurance payments and aids farm disaster victims who were not participants in the Federal Crop Insurance Program (about 75 percent of the farm community). Such actions tend to frustrate efforts to increase the participation rate in the crop insurance program.
In 1984, FmHA issued regulations implementing the wetlands executive order (E.O. 11990). The regulations prohibit loans for activities that would directly or indirectly affect wetlands unless there is "no practicable alternative." The Consolidated Farm and Rural Development Act also prohibits loans for activities adversely affecting wetlands, and the Swampbuster regulations prohibit direct, insured, or guaranteed lending that would affect wetlands.18 FmHA's loan agreements with borrowers provide for recall of a loan if wetlands are altered in violation of statutory provisions. FmHA has opted not to recall loans in response to Swampbuster violations, but does deny all loan servicing alternatives to borrowers until they are back in compliance with Swampbuster.
Persons applying for FmHA loans are required to certify that they are in compliance with Swampbuster and that the borrowed funds will not contribute to wetland conversion activities in any way. However, once the FmHA loan is granted, borrowers are not required to certify annually that they are in compliance. FmHA is considering changing this regulation to require annual certification.
Violating certification constitutes a fraud: the submission of a false claim to the Government. This is a prosecutable offense, of course, and could be pursued either through the courts or administratively under the Program Fraud Civil Remedies Act. It takes administrative will to pursue either of these courses of action, however.
Finally, even if FmHA loans are not used for wetland conversion, they are used to sustain operators in flood-prone areas which might otherwise revert to wetland.
The Farm Financial Crisis of the 1980s and the FmHA
As of January 1987, nearly 10 percent of the Nation's farm operator households were experiencing some form of financial stress. These financially stressed households accounted for 35 to 40 percent of all farm debt, amounting to $34.6 billion worth of loans at risk of default. As of 1991, about $8 billion was written off as bad debt with no expectation of being repaid.
When the farm economy deteriorated in the early and mid-1980's, it became apparent that a significant portion of FmHA's loan portfolio would not be repaid by delinquent borrowers and that increased Congressional appropriations in the future would be needed to address shortfalls. According to the General Accounting Office (GAO), FmHA farm loan programs have become a continuous source of subsidized credit for 42 percent of FmHA's borrowers.19 GAO also noted the FmHA's loan losses amounted to 24 percent of its outstanding loans and 81 percent of its interest receivable (GAO 1988a and 1988b).
In 1987, Congress addressed the deteriorating financial position of farm lending organizations across the country in two acts: the Agricultural Credit Act of 1987 (ACA) and PL 100-71, a supplemental appropriations act. Congress directed FmHA to reinstate the "continuation policy" which allows borrowers to obtain additional credit without having to show an ability to repay prior loans. FmHA's loan servicing process traditionally included rescheduling, reamortization, and deferrals. The ACA liberalized this, authorizing FmHA to write-down delinquent loans to allow borrowers to continue operating their farms whenever possible.20 The Food, Agriculture, Conservation and Trade Act of 1990 (FACTA) limited post-November 28, 1990 debt write-down to a lifetime amount of $300,000. In addition, a loan cannot be written down to the point that the net present value of the reduced loan is less than the net recovery value of the loan (prior to restructuring)if liquidated through foreclosure. When no way can be found to restructure a loan through loan servicing and property is foreclosed on by FmHA or voluntarily conveyed to it, the former owner has the first opportunity to lease or repurchase the property, more often than not with Federal financing.
The Food Security Act of 1985 and FACTA amended the Consolidated Farm and Rural Development Act to include a provision for reduction of FmHA loan principal in exchange for a conservation easement placed on environmentally sensitive lands on the farm, including wetlands [§349 (7 U.S.C. 1997)]. This provision is currently not a mandatory part of primary loan servicing, but may be considered along with other loan servicing options if requested by a borrower. The FACTA conference report language strongly encouraged FmHA to consider the conservation easement process before offering write-down or other loan servicing options that result in outlays to the government. The conference report also stressed the intent of the Committee that the Secretary of Agriculture use the authorities provided to promote the debt for nature conservation easement option in light of the projected billions of dollars of uncollectible Federal farm loans.
As a part of the very complex loan servicing notice that FmHA sends to delinquent borrowers, FmHA includes a statement notifying borrowers of the availability of the conservation easement option. No explanation of the easement process or the potential financial advantages are provided that would encourage borrowers to request consideration for an easement. At the time of this writing, FmHA had not publicized this provision and fewer than 30 such conservation easements had been established in favor of other loan servicing options.
Wetland Conservation Restrictions and FmHA Resale Property
The wetlands and floodplains management executive orders suggest that when Federal property is to be leased or sold, restrictions be placed in the lease or deed that will protect and enhance the wetlands and floodplains on the property. In 1984, FmHA concluded that based on the executive orders, it has a responsibility to protect and enhance wetlands in conjunction with its property disposal process. Accordingly, FmHA issued regulations requiring that prior to resale, a conservation easement be placed on land containing wetlands and the resale value of the property reduced to compensate for the easement.
In 1989, USDA considered relaxing FmHA's responsibilities for establishing wetland and floodplain conservation easements on properties being leased or repurchased by prior owners. Prompted by this action, Congress reaffirmed the need to protect wetlands in the Conference Report accompanying H.R. 4404, the supplemental appropriation for FY 1990. In explanatory remarks for the record, Rep. Conte, the author of the wetland language in the Report, stressed that wetlands as described in E.O. 11990 must be protected by the FmHA in conjunction with the FWS. Following these actions by Congress, FmHA abandoned its efforts to relax the rule.
Under the Agricultural Credit Act of 1987, after the rights of all prior owners and operators have expired, FmHA has the authority to transfer land to any Federal or State agency for conservation purposes. Congress provided FmHA with the land transfer flexibility in order to relieve the agency of land that was difficult to sell or manage and hence to reduce further losses to the government.
The 1990 Farm Bill (FACTA) requires the establishment of permanent wetland easements and upland buffers on FmHA inventory property. However, FACTA restricts the extent of such easements on frequently cropped wetlands and wetlands that have a history of haying or grazing. In cases where farmer owners or beginning farmers or ranchers are acquiring FmHA property, an easement may not be so large as to render a property inoperable for agricultural production. FmHA has promulgated regulations implementing these provisions in FACTA.
The Farm Credit System
The Farm Credit System (FCS) is a federally chartered cooperative, owned by farmers. Established by the Government before World War I to provide agricultural credit in rural areas, it is now made up of regional banks that make farm-operating and mortgage loans through local Land-Bank Associations and Production Credit Associations. Loan funds are obtained by selling bonds on the private bond market. There are no restrictions on how the loaned funds are used. Because the FCS is not a Federal agency, its lending activities are neither conditioned by the wetlands or floodplain management executive orders nor affected by Swampbuster.
In Volume I of this report we wrote that because the FCS is a privately owned cooperative, there are no Federal subsidies used to support its lending activities. This statement is no longer correct. The financial crisis in the farm sector during the 1980s prompted Congress to pass the 1987 Agricultural Credit Act. The ACA restructured the FCS; provided an infusion of interest-free capital to the FCS through the newly created Farm Credit System Assistance Corporation (FCSAC); and established the Federal Agricultural Mortgage Corporation (Farmer Mac) to facilitate the development of a secondary market for agriculture real estate loans by providing Federal guarantees for securities traded in the secondary market.21
The Farm Credit System Assistance Corporation issues 15-year, uncollateralized bonds, guaranteed by the U.S. Treasury. It uses these funds to buy preferred stock in troubled System banks. The FCSAC, with funds provided by the U.S. Treasury, pays all interest on these bonds for the first five years, half the interest during the second five years, and none thereafter.22 After 15 years the Farm Credit Administration23 will determine a schedule under which the FCS will repay all interest payments made by the FCSAC with Treasury funds.24 In the meantime, the public's ownership in certain FCS banks coupled with the assistance provided by the FCSAC may potentially give the government a controlling share in troubled System banks.25
Thus, although the FCS is not formally a Federal agency, it is sustained with significant Federal support. Consequently, it does not seem inappropriate to require that its lending activities be consistent with the objectives of Swampbuster and the executive orders.
Federal Tax Program
In addition to the effects of Federal programs, tax policies may have the unintended effect of increasing the incentive to drain and convert wetlands. Tax policies designed to stimulate agriculture, capital investment, recreation, and timber production may increase drainage and conversion or the modification of wetlands. By lowering the cost of development to the landowner, these tax policies may reduce costs and create incentives to develop more wetlands than would have been developed in the absence of these policies.
The income tax code played a more significant role in decisions to convert and develop wetlands in the past than it does now. Changes instituted by the Tax Reform Act of 1986 (TRA) eliminated many economic incentives affecting wetlands. Arguably the most important of these changes occurred in the agricultural section of the code, where provisions which allowed expensing (rather than capitalizing) of conversion and development costs were eliminated. The elimination of the preferential tax rate for capital gains may have had a significant effect on forestry, because most timber sales qualified for capital gains treatment under prior law. As a result, a major advantage of holding forest land was eliminated, but the implications of this for wetland conservation is different in different areas, and the net result is not at all clear. The TRA did reduce the after-tax gains on sale of improved cropland converted from wetlands.26 In general, tax reform eliminated a number of special provisions which were designed to promote wetland conversion and development, while leaving unaltered the tax deductibility of expenses and depreciation incurred during the ordinary conduct of business activities which happen to affect wetlands. For a more detailed discussion of past tax provisions which affected wetlands and tax reform see Volume I of this report.
In addition to those provisions of the tax code which encourage development, there are also provisions which encourage conservation. The Federal tax code allows landowners who donate land or easements to qualified conservation organizations to deduct the value of the donation as a charitable contribution. By reducing tax rates, the TRA reduced the value of tax deductions. Limited evidence to date suggests that subsequent charitable contributions have fallen.
The Alternative Minimum Tax (AMT) may have had an even greater effect on conservation donations than the TRA. Under the AMT the marginal tax rate is 21 percent, considerably less than the top bracket (28 percent) under the ordinary income tax code. More importantly, however, until 1993, under the AMT the amount of a deduction for the charitable contribution of property was limited to the original purchase price of the property. Under the ordinary income tax code the fair market value of the property constitutes the value of the donation for purposes of tax deductibility. Thus, for wealthier taxpayers subject to the AMT, the tax savings resulting from a gift was significantly reduced. In the case of wetlands, this was important, because conservation donations tend to come from wealthier individuals. In the Revenue Reconciliation Act of 1993 (RRA), however, Congress eliminated the restriction on charitable giving imposed by the Tax Reform Act of 1986, and reinstated the full deductibility of contributions of appreciated property.
Other Agriculture Related Programs
A host of additional agricultural programs also support agricultural production (directly and indirectly), and may play a role in the decline of wetlands. These programs stabilize and improve many aspects of agriculture by helping to market perishable commodities, to develop new technologies, to disseminate new information to producers, and to promote consumption domestically and overseas. Some of these programs have been authorized because Congress wants to support the social benefits which they provide. Examples include:
- Marketing orders are Government-sanctioned rules between producers and handlers to regulate the quantity and/or quality of specific fruits, nuts, vegetables, and specialty crops and the price of milk. The orders are implemented through formal rules, administered by industry committees and monitored by USDA. The orders are binding on all producers and handlers (initial buyers of a regulated commodity), and carry stiff penalties. Proponents believe that marketing orders provide consumers with stable, reasonably-priced supplies of high-quality products. Critics believe that these orders can foster higher prices and fewer choices at the retail level.
- The Agricultural Marketing Service receives a permanent appropriation equivalent to 30 percent of customs receipts collected the previous year. Only about 10 percent of this appropriation is devoted to promoting domestic consumption and export of agricultural commodities. The rest is used to fund the National School Lunch Program.
- An export credit program subsidizes purchasers of U.S. agricultural exports through credit guarantees, below-market interest rates, and sometimes interest-free lending.
- Foreign and domestic nutrition programs (including PL-480, food stamps, the Commodity Supplemental Food Program, Supplemental Food for Women, Infants, and Children, and Temporary Food Emergency Assistance) provide outlets for surplus food production or subsidize consumer purchases expanding outlets for agricultural products.
- Ethanol subsidies provide the incentive to convert grains into fuel-grade ethanol. Production of such fuel would be uneconomical without the Federal program.
Some of these programs provide subsidies that stimulate demand for agricultural commodities, while others are simply the mechanisms by which the Government markets or disposes of the surplus commodities it has already subsidized and stockpiled. Some may lend themselves to be conditioned with conservation restrictions,27 while others may be too remote to be suitable vehicles for such constraints. Their presence indicates the degree to which Government has become involved in a purely private activity: the production and sale of food.
In addition to those agriculture programs which adversely affect wetlands, there are a number of programs designed to promote wetlands protection. Prominent among these are the Conservation Reserve Program (CRP) and the Wetland Reserve Program (WRP).
Conservation Reserve Program
The Conservation Reserve Program, established by the 1985 FSA, was expanded by the 1990 FACTA to include wetlands and other types of environmentally sensitive lands. The program, operated by the ASCS, offers landowners annual rental payments for 10 years in return for converting environmentally sensitive cropland, mainly highly erodible cropland, to permanent vegetative cover. The seeding and other needed measures must be done according to a plan approved by the Soil Conservation Service and the local conservation district.
The 1990 Farm Bill called for enrolling a total of at least 40 million acres and no more than 45 million acres in the CRP by 1995. USDA now plans to enroll no more that 40 million acres (39 in CRP and 1 million for WRP). Approximately 37 million acres have already been enrolled. Although the Act expanded the categories of eligible lands to include marginal pasture lands planted to trees, USDA has limited eligibility to cropland. The Act continues the general limitation that not more than 25 percent of a county's cropland may be enrolled in the CRP.
The CRP focuses primarily on highly erodible cropland, but more than 410,000 acres of farmed wetlands have been enrolled under 10 year rental contracts. These contracts will soon begin to expire, however.
Wetland Reserve Program A new program established in 1990 by FACTA, the Wetland Reserve Program is a voluntary program to restore and protect up to 1 million acres of wetlands. Landowners entering into the program must agree to restore, with 75 percent cost-sharing, previously drained wetlands (now being cropped), and record a conservation easement in exchange for a Federal payment not to exceed the value of the land. Compatible uses may be conducted in the easement area, but cropping is not allowed. Although the law allows either 30 year or permanent easements, initially only permanent easements are eligible. FACTA sets an enrollment goal of one million acres by 1995, at a project cost of $900 million. The program gives priority to wetlands that enhance habitat for migratory birds and other wildlife. Under the Act, the Fish and Wildlife Service assesses the eligibility of each offered property, and must approve the restoration and management plans for each easement area.
Cate, P.C. and G. S. Becker. 1984. Federal Farm Programs: A Primer, 84-232 ENR. The Library of Congress, Congressional Research Service, Washington, DC, 133pp.
Dahl, T.E. and C.J. Johnson. 1991. Status and Trends of Wetlands in the Conterminous United States, mid-1970's to mid-1980's. U.S. Department of the Interior, Fish and Wildlife Service, Washington, DC, 28pp.
Heimlich, R. E. 1988. The Swampbuster Provision: Implementation and Impact. Proceedings of the National Symposium on Protection of Wetlands from Agricultural Impacts, Fish and Wildlife Service, Department of the Interior, Washington, DC, pp. 87-94.
Heimlich, R. E. and L. L. Langner. 1986. Swampbusting in Perspective. Journal of Soil and Water Conservation, vol. 41 (July-August), pp. 221-224.
U.S. General Accounting Office. 1988a. Farmers Home Administration; Farm Loan Programs Have Become a Continuous Source of Subsidized Credit. U.S. General Accounting Office, Washington, DC, November, 46pp.
U.S. General Accounting Office. 1988b. Financial Audit; Farmers Home Administration's Losses Have Increased Significantly. U.S. General Accounting Office, Washington, DC, December, 47pp.
1 The Food and Agriculture Act of 1965, The Agricultural Act of 1970, The Agriculture and Consumer Protection Act of 1973, The Food and Agriculture Act of 1977, The Agriculture and Food Act of 1981, and The Food Security Act of 1985, as amended by the Food, Agriculture, Conservation, and Trade Act of 1990.
2 Crops eligible for deficiency payments are a subset of those eligible for nonrecourse loans.
3 The loan rate is always lower than the target price used to determine deficiency payments. See below.
4 Essentially, the grower sells his crop, and the Government accepts the proceeds as payment-in-full for the loan.
5 A deficiency payment is equal to the minimum of (1) the target price less the market price or (2) the target price less the loan rate.
6 As indicated above, the farm programs are designed to guarantee adequate levels of production while ensuring a stable economic return to growers. They are not specifically designed to support small farmers. Because a participant's benefits are based on production rather than income, larger farmers receive larger payments. In 1982, the distribution of deficiency payments was as follows: the largest 17 percent of farms (500 or more acres) received 60.2 percent of the payments; the smallest 50 percent (farms less than 140 acres) received 10.2 percent of the payments.
7 Program rules sometimes required two years of nonparticipation before the new acreage qualified as part of the base.
8 Again, from the point of view of wetlands, the restriction is redundant due to Swampbuster.
9 The discussion here of Swampbuster is brief, and only constitutes a summary and update of chapter 5 in Volume I.
10 The sanction is triggered either by planting an annual crop on a wetland converted after December 23, 1985, the date of enactment of the Food Security Act of 1985 (FSA) or by converting a wetland after November 28, 1990, the date of enactment of the Food, Agriculture, Conservation, and Trade Act of 1990 (FACTA).
11 The implementing regulations define artificial wetland to include wetland which was converted prior to passage of the Act, "but now meets wetland criteria due to the actions of man." (7 CFR 12.31[c].)
13 An example in which an agricultural subsidy may encourage wetland conversion but Swampbuster is ineffective occurs when no direct Federal payment is made to the producer, such as in the dairy price support programs. Under these programs, the Government purchases surplus cheese, butter, and powdered milk from manufacturers, not dairy farmers. But the artificial demand generates higher prices for dairy farmers. Given the indirect nature of this price support, it is difficult to devise a sanction that can be applied selectively to those dairy farmers who convert wetlands. Ralph Heimlich (1988) has found that of the 78.4 million acres of nonfederal wetlands left, only about 17 million acres (22 percent) have some probability of being converted to cropland. According to Heimlich's estimates, Swampbuster may halt conversion on about 6 million acres but is likely to be ineffective on another 6.3 million acres.
14 The list of programs consists of price and income support payments, farm storage facility loans, grain storage payments, FmHA loans, crop insurance, disaster payments, and loans used to convert wetlands.
15 The FCIC borrows from both the Treasury and the CCC, but only a small amount ($113 million) has come from the Treasury. Further, no interest has ever been paid on the loans from the CCC, and the Secretary of Agriculture always forgives the debt, thus making the loans a transfer from the CCC to the FCIC.
16 This is down substantially from January 1987, when FmHA held more than $26 billion (14 percent) of all U.S. farm debt, and had with more than 83,000 delinquent farm borrowers, owing $7 billion. Over three-fourths of these delinquencies were more than 3 years past due.
17 For example, the Disaster Assistance Act of 1988 required FmHA to provide $200 million in loan guarantees to farm operators who experienced financial stress due to the drought.
18 In order to deny a loan application for wetland considerations, FmHA must make a determination that the proceeds of such a loan will contribute to the conversion of wetlands to the production of an agricultural commodity. FmHA's regulations specify that if, at any time during the life of the loan, loan proceeds are substituted for non-loan funds and used to pay expenses which would have been covered by non-loan funds, allowing the non-loan funds to be used to convert wetlands, the loan proceeds shall be deemed to have been used for a purpose that contributes to converting a wetland. FWS field personnel believe that given the traditional mission of FmHA, it is inadvisable for FmHA personnel to have responsibility for making such findings.
19 These 42 percent have participated in FmHA financing programs for more than seven years.
20 In the loan servicing process, operating loans can be rescheduled for up to 15 years. Reamortization is for long term loans with reamortization of payments for up to 40 years from the date of the original loan. In addition, these loans can have interest rates reduced to "limited resource rates" which are 3 percent below the regular, discounted interest rates used by FmHA. Deferrals can be up to 5 years with no limit on the number of times a loan can be rescheduled, reamortized, and deferred.
21 These guarantees are made possible by a special reserve funded by guarantee fees and backed by a line of credit from the U.S. Treasury.
22 The Farm Credit System bank which received the assistance bears the burden of the rest of the interest expense.
23 The entity which regulates the FCS.
24 Repayment of the interest will not eliminate the Federal subsidy, since the interest payments themselves serve as interest-free loans.
25 Farm Credit Banks that have received assistance include the Louisville (OH, IN, KY, TN), Omaha (SD, IA, NE, WY), St. Paul (MN, WI, ND, MI), and Jackson (LA, MS, AL) Districts. The Jackson, Mississippi District is currently insolvent and in receivership.
26 Sec. 403 the Tax Reform Act specifically subjects the gains from sale of "converted wetlands" to ordinary income taxation rather than to capital gains tax treatment. This was done as a precaution, i.e., in the event that preferential tax treatment of capital gains is reinstated in the future, such preferential treatment will not automatically be extended to wetlands converted to agriculture. However, Sec. 403 does not apply to wetlands converted for any other purpose.
27 For example, eligibility to participate in a marketing order might be added to the programs subject to sanctions under Swampbuster.
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