oversight

Federal Deficiency Payments Should Not Be Made for Crops Not Grown

Published by the Government Accountability Office on 1977-05-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               REPORT TO THE CONGRESS
-,+.Iā€™ ā€˜7;1+
               BY THE COMPTROLLER GENERAL
               OF THE UNITED STATES
                                                                  lllllllllllllllllllllllllllllllllllll
                                                                         LM102133
                                                                                          _


               Federal Deficiency Payments
               Should Not Be Made
               For Crops Not Grown

               Department         of Agriculture



               The Commodity     Credit Corporation is making
               an estimated $135 million in deficiency    pay-
               ments to rice farmers for the 1976 rice crop.
               These payments are based on the extent that
               the national average market price received by
               rice farmers was below a target price estab-
               lished by law. About      $5 million    of this
               amount will be paid for rice not grown and
               thus not marketed.

               The situation   in which payments   would be
               made on unplanted       and thus unmarketed
               crops could arise under the 1977 rice, wheat,
               and feed grain programs and under future pro-
               grams for these crops should current legisla-
               tion be extended.

               Legislative proposals have been made to pre-
               clude     deficiency payments  on unplanted
               crops. Some such legislation   should
               acted.



               CED-77-77                                         MAY 24,            1977
                 FEDERAL DEFICIENCY PAYMENTS                                                                                          CED-77-77
    ,.3
                 SHOULD NOTIBE MADE FOR CROPS
 *                                                                                                                                    5-24-77
                 NOT GROWN/
4 8 ;' ,!-1_./   DEPARTMENTOF AGRICULTURE

                           Under the Rice              Production       Act     of 1975,             the Commodity                 Credit      Corpor-

                 ation,      Department           of Agriculture,              was paying             about         $135 million              in so-

                 called      deficiency           payments         to rice      farmers         because             the average             market      price

                 of the 1976 rice               crop      was below          the target             price      established               by the act.

                 The rice          deficiency          payments       were based on acreage                         allotments.               Farmers

                 having      allotments,              but who did       not     plant      rice,            could         receive        payments.          We

                 estimated          that      about      $5 million          of the total             amount would                 be paid      to farmers

                 who had rice               acreage     allotments           but who did not plant                         rice     on some or all

                 of their          allotments          and thus       did     not have rice                 to market             from    such acreage.

                           The 1976 rice              crop was the first                crop        on which         deficiency              payments

                 based on the target                   price      concept      were being              paid.         Similar          payments        were

                 authorized           for     wheat,      feed     grains,      and cotton              but,        because market prices
                 for      these     crops       had been above their               target            prices,         no deficiency               payments

                 were necessary.                 The situation              in which      payments             would        be made to farmers

                 who do not plant                could     also     arise      under      the        1977 rice,             wheat,        and feed       grain

                 programs,          and under          future      programs       for     these         crops        if     existing          legislation

                 is extended,               because      deficiency          payments      on these             crops         would       be based on

                 alloted          rather      than     planted      acreage.            For cotton,             deficiency               payments       were

                 specifically               based on planted           acreage      within             the allotment                so the same sit-

                 uation      could          not occur.

                           IJe recommended             to the Congress            that,        if      the target             price         concept     was

                 continued          beyond the           1977 crops,          the Congress              should            adopt     legislation

                 that      would      preclude         deficiency           payments      on crops             not grown.
    Department   of $_gricultur~:
,,&--
         The Congress       should    adopt    legislation,       if   the target   price   concept

            is continued,      that    would    preclude      deficiency     payments   on crops

            not grown
                      COMPTROLLER      GENERAL    OF     THE       UNITED   STATES
                                    WASHINGTON.   D.C.     20548




B-114824



Speaker    of   the   House of       Representatives
        Under the Rice Production           Act of 1975 (Public         Law
94-214,    90 Stat.     181),    the  Commodity      Credit   Corporation,0       6cfio2sfi
Department     of Agriculture,         is paying     about $135 million        in
so-called    deficiency       payments to 25,000 to 30,000 rice
farmers    because the average market price                of the 1976 rice
crop was below the target            price   established      by the act.
The rice deficiency         payments,      which can range up to $55,000,
the maximum permitted          by law, are based on acreage             allot-
ments.     Farmers having       allotments,      but who do not plant          rice,
may receive     payments.
        On the basis of our review              of these payments,          we
estimate      that about $5 million           of the total        amount will
be paid to farmers             who had rice acreage allotments              but who
did not plant         rice on some or all of their              allotments      and
thus did not have rice              to market     from such acreage.           Our
interviews       indicated       that the sentiment        at the local
level    was that,        if a farmer did not plant          and thus did not
market rice,        he had no need for Government               assistance      to
attain     a target      price.       One farmer,     for example,       who did not
plant    rice but received            a payment of almost         $14,000 on his
allotment,       told us that it was ridiculous               for the Government
to pay him if he did not plant                rice.      An official       of a farm-
ers'    association         told us that such payments on unplanted
rice allotments          gave the rice program a bad image.
         The 1976 rice crop is the first            crop on which defi-
ciency     payments based on the target            price     concept    are
being paid.       Similar     payments have been authorized              for
wheat,     feed grains,     and cotton    since the 1974 crop year
but, because market prices            for these crops through            the 1976
crop year have been above their             target      prices,    no deficiency
payments have been necessary.             The situation          in which pay-
ments would be made to farmers            who do not plant           could also
arise     under the 1977 rice,       wheat,    and feed grain         programs,
and under future        programs    for these crops should current               leg-
islation      be extended,     because deficiency          payments on these
        B-114824


        crops are or would be based on allotted        rather              than planted
        acreage.   For cotton,    deficiency   payments are               specifically
        based on planted    acreage within   the allotment                so the same
        situation  could not occur.

.               Legislative      proposals  have been made to preclude
        deficiency        payments on unplanted    rice and other  crops.  We
        are recommending          that the Congress adopt some such legis-
.       lation.
               We made our review pursuant               to the Budget and Account-
        ing Act, 1921 (31 U.S.C.           53), and the Accounting             and Audit-
        ing Act of 1950 (31 U.S.C. 67).                  It was made at the Depart-
        ment's   Agricultural      Stabilization           and Conservation      Service
        headquarters       in Washington,       D.C.;      at three of the Service's
        State offices--Arkansas,           California,         and Louisiana;     and at
        a total    of 10 of the Service's             county offices       in these States
        and Texas.       The Service      administers        the Corporation's       pro-
        grams.     We also visited        some farms in the four States.
                We reviewed     the legislation      on the rice and other             target
        price    programs     as well as pertinent        regulations,        procedures,
        reports,     and records.         Also, we interviewed         national,     State,
        and county Service         officials;    some rice farmers;           an official
        of a rice      farmers'    association;    and agricultural           economists.
        TARGET PRICE CONCEPT
                The Agriculture      and Consumer Protection          Act of 1973
        (Public     Law 93-86,     87 Stat.      221) introduced     a new concept
        to assist      farmers --target      prices     for the 1974-77    crops of
        wheat,    feed grains,      and upland cotton.           The Rice Production
        Act of 1975 extended          the concept       to the 1976 and 1977 rice
        crops.      Under this     concept,      the Corporation     makes payments--
        called    deficiency      payments--to       farmers   if the national
    .   average market price          of a crop is below the target           price
        established       by law.

.             The purpose of the target           price  concept     is to provide
        a basis for varying          income supplements     to farmers      inversely
        with the market price           and thus moderate     the effects      of short-
        term price   fluctuations.l/           The concept    enables   price-support
        loan rates   to be set at competitive           market levels      and at the

        l-/   J.B. Penn and W.H. Brown, Target        Price   and Loan Rate
              Concepts for Agricultural       Commodities,    Economic Research
              Service, Department     of Agriculture,      ERS AFPR-1, January  1977,
              p. 69.

                                                     2
B-114824


same time guarantees           participating       producers      a supplemental
return  through   direct        Government       payments    if   prices  should
become depressed.
        The rationale        for payments     to farmers      seems to be that
the Government        each year should estimate            the anticipated
needs for the crop and guide production                  in such a way as
to enable      farmers     to achieve     a target   price.       If the Govern-
ment's    estimates      turn out to be wrong or if production               is
overstimulated,        the farmer's       income would be protected          to
the extent       of the target     price,     rather  than asking        the
farmer    to bear the whole risk.l/
        The deficiency        payment is based on the difference                 be-
tween the target         price    and the average market price               (or
price-support       loan rate,       if higher)     multiplied       by the
farm's    established       yield    and the allotted          acreage   (or
planted    acreage     in the case of cotton).               Acreage allotments
are historically         evolved     planting   goals used by the Depart-
ment to support        farm income through          price-support       operations
and direct      payments or to control          crop production         when
deemed necessary.           The established       yield      is determined       on
the basis of the yield            per harvested      acre for the 3 pre-
ceding years.
       Farmers have planting       flexibility.            They do not neces-
sarily    lose their    allotment     if they do not plant             the specific
crop and shift       to other crops.         Legislation       protects      their
allotment     by allowing     them to plant        specified      substitute
crops.
ALLOTMENT AND PRODUCTION DATA
        The national         rice acreage allotment           established      by the
Rice Act for the 1976 crop year was 1.8 million                         acres.      The
Department       distributed        this allotment      to the farming         level
on the basis of allotments                established     for the preceding
year.      The allotment         is not a control       over production,           as
in previous        programs,       but serves as a basis for determining
deficiency       payments and other benefits               (price-support        loans
or disaster        payments).         A farmer with no rice allotment               may
produce     rice but is not eligible               for deficiency       payments or
other    benefits       under the rice program.

                 --
1/Ede       T. Coffman,   Target    Prices, Deficiency      Payments, and
    the Agriculture    and Consumer Protection       Act o? 1973, North
    Dakota Law Review, Vol.      50, No. 2, Winter      1973, p. 299.
                                            3
B-114824


       The rice program is considered      to be market                   oriented
because a farmer with a rice allotment          may plant                 rice    in
excess of his allotment       or may plant   other crops,                   if he
considers    it desirable,    without acreage    limitation                   and with-
out losing     his allotment.
       Substantially      all of the Nation's     rice production                 comes
from   four States      as shown in the following      table.
                                                            Production
                    State                                               1976
                                                    1975             (note a)
                                                       (1,000     cwt.)

        Arkansas                                   40,053                40,362
        California                                 30,436                23,388
        Louisiana                                  25,064                22,203
        Texas                                      24,996                24,430
        Mississippi--Missouri                       7,423                 6,636
              Total,    excluding    minor
                 production      in sev-
                 veral    Southern
                 States                          127,972             117,019
        a/   Preliminary.
        Program data reported            by the Agricultural         Stabilization
and Conservation        Service      county offices        for the 1976 rice
crop is shown in the table               on page 5. The data shows that
allotment      holders,    as a group,         exceeded their      allotments       by a
total    of 519,000 acres.           Some allotment        holders     planted     within
their    allotments     or did not plant           rice   at all.      This under-
planting      of allotments,       totaling       56,000 acres,     was more than
offset     by allotment      holders       who planted     more than their         allot-
ments.       This overplanting        of allotments        totaled     575,000 acres.
Farmers with no allotments               planted     258,000 acres of rice.
B-114824
                                                                         Acreage
                                                            Planted      planted
                                               Allotted       rice       over or
                                               acreage      acreage      under (-)
                                               (note a)    (note a)      allotment
Allotment       holders:
    Planting     within
       allotment
         Arkansas                                51,395      46,623        -4,772
         California                             143,066     139,124        -3,942
         Louisiana                              282,139     242,219      -39,920
         Texas                                  216,981     211,710        -5,271
         Mississippi--Missouri                    7,378       4,841        -2,537

            Subtotal                         b/700,959      644,517      -56,442
   Planting     more than
      allotment
         Arkansas                               379,657     704,470      324,813
         California                             183,096     251,082       67,986
         Louisiana                              227,666     285,355       57,689
         Texas                                  242,886     304,913       62,027
         Mississippi--Missouri                   47,505     110,056       62,551
            Subtotal                         1,080,810    1,655,876      575,066
            Total,     allotment
               holders                       1,781,769    2,300,393      518,624
Nonallotment        holders:

         Arkansas                                           145,118      145,118
         California                                          10,960       10,960
         Louisiana                                           39,900       39,900
         Texas                                               13,306       13,306
         Mississippi--Missouri                               48,552       481552
            Total,      nonallotment
                holders                                     257,836      257,836
            Total                      --b/c/1,781,769    2,558,229      776,460
a/ Excludes     States  having minor allotments.
E/ Excludes     some farms that were not planted              to rice.
F/
- Total    allotment    was 1.8 million   acres.
B-114824


RICE DEFICIENCY      PAYMENTS
        The target   price for the 1976 rice crop was $8.25 a
hundredweight.       This amount was determined     by the Depart-
ment on the statutory      basis of $8.00,   adjusted    for changes
in the index of prices       paid by farmers   for production    items,
interest,     taxes,  and wages from February     1976 (when the
Rice Act was approved)       to July 31, 1976 (up to the begin-
ning of the rice marketing       year).
        The Department     computes the payment rate by subtract-
ing from the target        price    the higher     of (1) the national
average market price         received   by farmers     or (2) the price-
support     loan amount.       For the purpose      of computing    the pay-
ment, the average market price            received    by farmers    covers
the first      5 months of the rice marketing          year (August      through
December).       The Department's      Statistical     Reporting    Service
ascertained      that the average market price           for the 5-month
period     in 1976 was $6.55 a hundredweight.              This was higher
than the support       rate of $6.19,       thus the deficiency       below
the target      price  was set at $1.70 a hundredweight            ($8.25 less
$6.55).
        The Department   initially      estimated    rice deficiency       pay-
ments at about $140 million           on a projected     payment rate of
$1.75 a hundredweight.           On the basis of each State's         rice
acreage allotment      and average acreage yield          and the final
deficiency     rate of $1.70 a hundredweight,           we estimate     that
final    payments will   total     $135 million     with distribution        of
payments among the States          approximately     as follows.
                                                   Government
                   State                            payment
                Texas                            $ 34,000,000
                Arkansas                           34,000,000
                Louisiana                          32,000,OOO
                California                         31,000,000
                Other                               4,000,000
                      Total                      $135,000,000
DEFICIENCY PAYMENTS ON ACREAGE
NOT PLANTED TO RICE

      Under the rice program,          a farmer who has a rice      allot-
ment but plants     no rice or less rice acreage           than the allot-
ment may receive      a deficiency       payment on the whole allotment.
On the basis of Agricultural           Stabilization    and Conserva-
tion Service    records,     we estimate       that, of the total   rice
                                        6
B-114824


deficiency      payments being made on the 1976 crop,  about $5
million    will   go to farmers to attain  the target price  on
rice that they did not plant      and thus did not market.    Some
examples    of such payments are shown below.

                       Unplanted                    Calculated           Deficiency
                       allotment    Estab-          production           amount on
                        acreage     lished         on unplanted          unplanted
    Rice     Planted     (col.   1 yield            allotment            allotment
 acreage      rice         minus      per             (col.      3      (col.    5 x
allotment    acreage       col.  2) --acre           x col.        4)   $1.70 cwt.)
     (1)        (2)       --VT--       (4)                  (5)-              (6)
                                     -------pounds-------

    13.3         1.4        11.9     5,184               61,690           $ 1,048.72
    30.1                    30.1     4,002              120,460              2,047.82
  154.1       125.4         28.7     5,724              164,279              2,792.74
  103.0                    103.0     3,507              361,221              6,140.76
  239.6                    239.6     4,255           1,019,498             17,331.47
11359.5                 1,359.S      3,827           5,202,807          ~/55,000.00
a/   Maximum amount    allowed     by law.
POTENTIAL FOR DEFICIENCY
PAYMENTS ON 1977 CROPS
                     - -
        There are indications          that deficiency      payments could be
necessary      on the 1977 wheat crop as well as on the 1977 rice
crop.      During    the early    part of 1977, the national         average
market price       received     by farmers   for wheat was about $2.45 a
bushel.      The target     price    for the 1977 wheat crop,        for which
the marketing        year begins     in June, is $2.47 a bushel.         Thus,
deficiency      payments will      be necessary       on that crop if the
average price        for the June-October        period    does not reach the
$2.47 level.
        During    the early    part of 1977, the national        average mar-
ket price      received    by farmers     for rice was about $6.78 a hundred-
weight.      The target     price   for the 1977 rice crop will         be $8.25
a hundredweight,        adjusted    to reflect     any changes in the index
of prices      paid by farmers      for farming     costs.   Thus, deficiency
payments will        be necessary     on rice   if the average price       for
the August-December         period    does not reach the target       price.




                                        7
B-114824


PROPOSALS FOR ELIMINATING DEFICIENCY
PAYMENTS ON UNPLANTED CROPS
       We discussed    the rice situation        with the staffs    of the
House Agriculture      Subcommittee     on Oilseeds     and Rice and the
Senate Committee      on Agriculture,     Nutrition,     and Forestry    on
April   1, 1977.    On April     6, 1977, the House Subcommittee         ap-
proved a bill     (H.R. 5994, 95th Cong.,         1st sess.)   that would
link deficiency     payments on rice to that portion           of the al-
lotment   that is planted      to rice.
       The concept       of House bill        5994 is that farmers            would
be eligible       for deficiency         payments only on that portion               of
their    allotments      on which they plant            specific    crops--in       this
case, rice.         While the concept         would generally         preclude      pay-
ments on crops which are not grown,                   it may also have an
undesirable       side effect         in that it could be an incentive                to
plant    a crop which is or could be in a surplus                     situation.
Also,    it may conflict           with the market-oriented           concept     of
allowing      farmers    flexibility        in deciding       which crops to plant.
        The Administration's        proposed     farm program,         which the
Department     of Agriculture       transmitted        to the House and
Senate Agriculture         Committees     on March 30, 1977, included               a
proposal    that deficiency        payments on rice and other               crops
be based on the ratio          of planted     acreage needed for domestic
and export     use to the acreage actually               planted.      For example,
if the Department        determined     that 50 million           acres of a
crop were needed and farmers            planted      55 million       acres,    farmers
would be given deficiency           payments     (if     the market price         was
below the target        price)   on the ratio        of 50/55 of their
planted    acreage.
          The Administration's           proposal   would discontinue       the use
of acreage allotments           in     determining     deficiency     payments.
It would not provide           an    incentive     to plant     a crop which is
or could be in a surplus               situation     and it would allow       farmers
flexibility      in deciding         which crops to plant.
CONCLUSIONS
        The objectives        of the target      price     concept    are to (1)
guarantee      farmers     a supplemental      income if market prices
fall    below target       levels    and (2) allow       farmers    flexibility
to make their       planting      decisions    on the basis of market
conditions.        Under the rice program,            farmers     can plant     crops
other    than rice on their          rice allotments         but, because defi-
ciency     payments are based on allotted               acreage,    farmers     can
receive     payments on rice that they do not plant                   and market.

                                             8
B-114824


For the 1976 rice      crop,   such payments      will   amount   to about
$5 million.
       Because deficiency         payments under the wheat and feed
grain   programs       also would be based on allotted     acreage,      it
is conceivable         that,  if these programs  are continued      in
their   present      form and if market prices     should  fall   below
target   prices,       Government   payments on unplanted    wheat and
feed grain      allotments,      as well as on unplanted   rice   allot-
ments, could be substantial.
RECOMMENDATION TO THE CONGRESS
       We recommend that,     if the target       price  concept is
continued     beyond the 1977 crops,       the   Congress adopt legis-
lation    that will  preclude   deficiency       payments on crops not
grown.


        We are sending   copies of this   report  to the Director,
Office     of Management and Budget,    and to the Secretary    of
Agriculture.


                                      2iizA~
                                      Comptroller   General
                                      of the United   States




                                       9
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