oversight

U.S. Department of Agriculture: Marketing Assistance Loan Program Should Better Reflect Market Conditions

Published by the Government Accountability Office on 1999-11-23.

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

                United States General Accounting Office

GAO             Report to the Ranking Minority Member,
                Subcommittee on Forestry,
                Conservation, and Rural Revitalization,
                Committee on Agriculture, Nutrition,
                and Forestry, U.S. Senate
November 1999
                U.S. DEPARTMENT
                OF AGRICULTURE
                Marketing Assistance
                Loan Program Should
                Better Reflect Market
                Conditions




GAO/RCED-00-9
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-283795

      November 23, 1999

      The Honorable Kent Conrad
      Ranking Minority Member
      Subcommittee on Forestry, Conservation,
        and Rural Revitalization
      Committee on Agriculture, Nutrition, and Forestry
      United States Senate

      Dear Senator Conrad:

      The marketing assistance loan program is designed to provide producers
      of certain crops with interim financial assistance at harvest, when prices
      are usually lower than at other times of the year. By doing so, the program
      effectively guarantees a minimum price for those crops. For 1998 crops,
      the program provided $6.7 billion in loans. It also provided $3.7 billion in
      cash payments, as of September 22, 1999, up from $162 million for 1997
      crops. This jump in cash payments occurred because of substantial
      declines in crop prices; payments are expected to grow to about
      $5.9 billion for 1999 crops.

      The program is composed of two major components—loans and loan
      deficiency payments—and is available to producers of certain
      crops—wheat, feed grains, oilseeds, upland cotton, and rice. Under the
      loan component, producers can obtain a marketing loan after harvest by
      using their crop as collateral. The loan amount is based on a statutory
      national loan rate ( a per-unit price for each crop) that is adjusted by the
      U.S. Department of Agriculture (USDA) to reflect county variations in
      market prices across the country. To determine the loan amount, USDA
      multiplies the county loan rate by the amount of crop offered as collateral.
      Producers can settle a loan in one of three ways. First, producers can sell
      their crop and repay the loan plus interest. Second, if crop prices remain
      too low to allow producers to repay the loan plus interest, they can sell the
      crop and repay the loan at the posted county price—a USDA estimate of the
      local market price (for cotton and rice, USDA uses the adjusted world
      price)—and keep the difference. This difference is called a marketing loan
      gain and is one of two types of cash payments available through the
      program. Finally, producers can forfeit their collateral and keep the loan
      amount. The program’s other component—the loan deficiency
      payment—provides the other type of cash payment available under the
      program. This payment reflects the difference by which the applicable
      county loan rate exceeds the posted county price on the day a producer




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                   requests a loan deficiency payment. If producers choose this component,
                   they receive a cash payment and can sell their crop whenever they choose.
                   The program did not allow producers to receive more than $75,000
                   annually in cash payments—total marketing loan gains and loan deficiency
                   payments. However, USDA’s appropriations act for fiscal year 2000 (P.L.
                   106-78, Oct. 22, 1999) includes provisions that increased this payment
                   limitation to $150,000 for 1999 crops only.

                   The large increase in cash payments in 1998 prompted your concern, and
                   you asked us to determine (1) which producers received cash payments
                   through the program, by type of crop and state; (2) why some producers
                   did not participate in the program; and (3) what types of concerns have
                   been raised about the program’s effect on cash payments and potential
                   forfeitures.


                   As of September 1999, $3.4 billion of the $3.7 billion in cash payments
Results in Brief   went to producers of four crops—corn, soybeans, wheat, and upland
                   cotton. The top 10 states in which producers received this assistance were
                   Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, North Dakota, Ohio,
                   South Dakota, and Texas.

                   For a number of reasons, some producers of eligible crops did not
                   participate in the marketing assistance loan program in 1998. These
                   producers could not receive a loan deficiency payment because (1) the
                   posted county price for their crop equaled or was higher than the
                   applicable loan rate; (2) they had sold their crop before requesting a loan
                   deficiency payment and therefore were no longer eligible for a payment; or
                   (3) they had produced crops, such as rye, that were not covered by the
                   program.

                   As the use of the marketing assistance loan program increased, producers
                   and USDA officials raised a number of concerns about (1) inconsistencies in
                   the cash payments available to some producers but not to others and
                   (2) the heightened potential for loan forfeitures. First, they pointed out
                   that because the rates for loan deficiency payments have been consistently
                   higher in some counties than in nearby or adjoining counties, the
                   program’s design has created an incentive for producers to move their
                   grain from one county to another to receive a higher payment. Many have
                   done so. Second, because of the way USDA established its loan rates and
                   posted county prices, producers of classes of wheat that have higher
                   market prices have received, or are likely to receive, lower rates for loan



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             deficiency payments than producers of classes of wheat that have lower
             market prices. On the other hand, producers of lower-priced classes of
             wheat have been able to receive higher rates for loan deficiency payments.
             Third, because the national loan rates for some crops, such as soybeans,
             were set at levels that cover significantly more of production costs than
             the national loan rates for other crops, an incentive has been created to
             plant crops in response to government payments rather than to market
             demand—which was not the intention of the 1996 Farm Bill’s overall goals.
             Finally, the program had a cash payment limitation of $75,000. USDA
             officials told us they were concerned that producers would use the
             program’s loan component to obtain financing and would forfeit their
             collateral to the government once they reach the payment limitation.1 USDA
             has recognized that some inconsistencies and unintended consequences
             have emerged as the program has been implemented. However, the
             Secretary of Agriculture has not yet made the changes he could make to
             the program because of concerns about decreases in some producers’
             income during a period of low crop prices. Other possible changes to the
             program’s design would require legislation. We are recommending that the
             Secretary develop and implement administrative changes and, as
             necessary, seek legislative changes from the Congress to address the
             issues we identified.


             The Federal Agriculture Improvement and Reform Act of 1996, referred to
Background   as the 1996 Farm Bill, changed the federal government’s long-standing
             approach to farm support—from a policy based on managing crop
             production and supporting farm income through a variety of payment
             mechanisms and supply restrictions to a policy that allows producers
             flexibility in what they plant and provides fixed, but declining, income
             support payments through fiscal year 2002. The 1996 Farm Bill retained a
             commodity loan program, including its provisions for marketing loan gains
             and loan deficiency payments. This program is now known as the
             marketing assistance loan program.

             In 1996, the first year in which the 1996 Farm Bill was in effect, the
             marketing assistance loan program served primarily as a source of interim
             financing because crop prices were high enough to enable producers to
             sell their crops and repay their loans. However, in 1998, when market
             prices fell below the loan rates, a large number of producers turned to the
             marketing assistance loan program as a source of income.


             1
              As discussed earlier, USDA’s appropriation act for fiscal year 2000 provides an interim solution by
             increasing the payment limitation to $150,000 for 1999 crops only.



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How the Marketing         To participate in the marketing assistance loan program, producers must
Assistance Loan Program   meet several criteria. They must harvest eligible crops,2 and for some
Works                     crops, must have entered into the 7-year production flexibility contracts
                          established in the 1996 Farm Bill.3 Furthermore, producers must own the
                          crop at the time they request assistance. That is, they must not have
                          relinquished ownership of the crop by a date that is earlier than the date
                          they requested assistance. This provision is necessary because, in order to
                          provide a loan, the government must have the crop as collateral in case the
                          producer does not repay the loan. The producer’s retention of ownership
                          is known as having a “beneficial interest.”

The Loan Program          To obtain a marketing assistance loan, a producer pledges the harvested
                          crop as collateral and receives a loan based on the amount of the crop
                          offered as collateral multiplied by a loan rate for each unit of eligible
                          production. These loans provide producers with (1) financial assistance so
                          they do not have to sell their crop at harvest, when prices at local grain
                          elevators are usually lower than at other times of the year, and (2) a
                          guaranteed price—up to the loan rate, for their production.

                          Producers can settle their loans in one of three ways. First, they can repay
                          the loan’s principal and interest within the loan period, usually 9 months,
                          which is what producers generally do if crop prices are relatively high.
                          Second, producers can forfeit the crop to the government when the loan
                          matures and keep the loan principal as payment. This option provides
                          producers with a minimum guaranteed price for their crops. Finally,
                          producers of wheat, feed grain, and oilseeds can repay the loan at the
                          posted county price—a USDA estimate of the local market price—prior to
                          the loan’s maturity date, and sell the crop on the market.4 With this choice,
                          the difference between the county loan rate and the posted county
                          price—known as a marketing loan gain—is waived and is considered a
                          cash payment to the producer. Accrued interest is also waived but is not
                          considered a cash payment. The Secretary of Agriculture developed these

                          2
                           Barley; corn; upland cotton; grain sorghum; minor oilseeds (canola, crambe, flaxseed, mustard seed,
                          oil-type sunflower seeds, other types of sunflower seed, rapeseed, and safflower seed); oats; rice;
                          soybeans; and wheat.
                          3
                           Under the 1996 Farm Bill, any producer whose farm had a recorded planting history for wheat, feed
                          grains, upland cotton, and rice in any single year from 1991 to 1995 could sign a contract that provided
                          annual payments through 2002, regardless of the crop planted.
                          4
                           The 1985 Farm Bill mandated that cotton and rice producers be allowed to repay their loans at the
                          lesser of principal and interest or the adjusted world price. The 1990 Farm Bill mandated that soybean
                          producers be allowed to repay their loans at the lesser of principal and interest or a price that the
                          Secretary of Agriculture determined to be the posted county price. Under the mandates of the
                          Omnibus Budget Reconciliation Act of 1990, wheat and feed grain producers, beginning in 1993, were
                          allowed to repay their loans at the lesser of principal and interest or the posted county price.



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                              procedures for marketing loan gains in response to a congressional
                              mandate to establish alternative rates for loan repayments to minimize
                              potential loan forfeitures.

The Loan Deficiency Payment   In order to reduce the administrative work associated with producers’
                              obtaining a loan and paying it back on the same day to obtain the
                              marketing loan gain, statutory provisions mandated that USDA implement
                              loan deficiency payments in 1985 for upland cotton and rice; in 1991, for
                              oilseeds; and in 1993, for wheat and feed grains. The rate for a loan
                              deficiency payment is the amount by which the applicable county loan rate
                              exceeds the posted county price on the day the request for payment is
                              made.5 The rate provides an amount equal to the rate available for a
                              marketing loan gain on the same day. When the posted county price is at
                              or above the loan rate, no loan deficiency payments are available because
                              the intent of the program is only to guarantee that producers will receive
                              the loan rate for their crop. While producers who take a loan deficiency
                              payment do not incur the interest and administrative fees associated with
                              the loan option, they must assume the financial risk of decreases in crop
                              prices.


Determining Loan Rates        The Secretary of Agriculture adjusts loan rates from a legislatively set
                              national loan rate for each crop, generally on a county-by-county basis.
                              The average of the county loan rates weighted for production for each
                              crop must not exceed the national loan rate. The legislatively set national
                              loan rates are no higher than 85 percent of the average market price for
                              each crop for the preceding 5 years, excluding the high and low years.6 In
                              addition, the national loan rates for wheat and corn can be no higher than
                              1995 levels, and the national loan rate for soybeans may not exceed $5.26
                              per bushel. USDA has not updated many of the county loan rates for wheat
                              and feed grains in several years. Loan rates vary by location because they
                              are based on market prices—which are influenced by factors such as local
                              supply and demand and transportation. For example, in Iowa, the county
                              loan rates for corn ranged from $1.72 to $1.91 per bushel, depending on
                              the county where the loan was obtained. In contrast, in California, the
                              county loan rates for corn ranged from $2.37 to $2.61 per bushel. Figure 1



                              5
                               Cotton and rice use adjusted world prices. However because most of this report focuses on wheat,
                              feed grains, and oilseeds, we use posted county prices throughout the report.
                              6
                               For wheat, a weighted average posted county price for all classes of wheat is calculated on the basis
                              of the percentage distribution of the acreage of wheat class produced. The upland cotton and rice loan
                              rate formula differ somewhat.



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                                          shows the variation in the ranges of loan rates for corn throughout the
                                          United States in 1998.


Figure 1: Variations in the Ranges of Loan Rates for Corn Nationwide, 1998




                                                   $1.69 to 2.00 per bushel

                                                   $2.01 to 2.32 per bushel

                                                   $2.33 to 2.63 per bushel



                                          Source: GAO’s analysis of USDA’s data.




The Posted County Price                   USDAprovides daily and weekly posted county prices in about 3,000
System                                    counties for 18 of the crops included in the marketing assistance loan




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                                     program. USDA establishes the posted county price for each county using
                                     current prices from several of 19 terminal markets (such as Kansas City,
                                     Missouri), adjusted for local supply and demand factors and
                                     transportation from the county to the terminal. These terminal markets are
                                     used to establish the posted county price, even though the grain may not
                                     actually be shipped to or marketed through the assigned terminal location.
                                     The Department makes adjustments, as needed, to ensure that posted
                                     county prices continue to reflect a value as close as possible to the local
                                     cash market price in any given area. Posted county prices are based on
                                     terminal prices from the previous marketing day or week.


                                     For 1998 crops, most of the $3.7 billion in cash payments
Cash Payments                        —$3.4 billion—went to producers of four crops: corn, soybeans, wheat,
Provided to Producers                and upland cotton. Producers of barley and oats, however, received
                                     payments that amounted to a higher percentage of the value of these
                                     crops. The top 10 states in which producers received loan deficiency
                                     payments were Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, North
                                     Dakota, Ohio, South Dakota, and Texas. Table 1 shows cash payments, by
                                     crop, for 1998.

Table 1: Cash Payments Provided by
the Marketing Assistance Loan        Dollars in thousands
Program, 1998 Crops                                                     Marketing loan       Loan deficiency       Total cash
                                     Crop                                         gain             payment          payment
                                     Corn                                      $321,206              $998,607      $1,319,812
                                     Soybean                                    316,399               880,796       1,197,194
                                     Wheat (all classes)                         56,572               413,487         470,060
                                     Upland cotton                              223,054               254,346         477,400
                                     Barley                                        3,824               78,429          82,253
                                     Sorghum                                       3,340               57,017          60,357
                                     Oats                                            459               19,032          19,491
                                     Sunflower oil                                 5,178               14,051          19,229
                                     Canola                                          607                7,474           8,081
                                     Flax                                             79                1,657           1,736
                                     Rice                                        11,375                 1,007          12,382
                                     Sunflower                                        25                    1              26
                                     Mustard seed                                                                           0
                                     Safflower                                                                              0
                                     Rapeseed                                                                               0
                                     Total                                     $942,118             $2,725,904     $3,668,021
                                     Source: GAO’s analysis of USDA’s data, as of Sept. 22, 1999.




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                                       Figure 2 shows the percentage of cash payments in relation to the value of
                                       the crop produced. A crop’s market value is calculated by multiplying the
                                       annual average market price by the quantity produced. This figure shows
                                       that barley and oat producers received significantly larger payments in
                                       relationship to the value of these crops than did producers of other crops.


Figure 2: Cash Payments as a
Percentage of the Value of the Crops   14%
Produced in 1998

                                       12%

                                       10%

                                       8%

                                       6%

                                       4%

                                       2%

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                                       Source: GAO’s analysis of USDA’s data.




                                       Producers in 10 of the major crop-producing states received $1.8 billion, or
                                       66 percent of the loan deficiency payments for crops harvested in 1998.
                                       The top 10 states in which producers received this assistance were Illinois,
                                       Indiana, Iowa, Kansas, Minnesota, Nebraska, North Dakota, Ohio, South
                                       Dakota, and Texas.




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                            Some producers did not participate in the marketing assistance loan
Reasons Some                program in 1998 for a number of reasons. The issue of nonparticipation
Farmers Did Not             surfaced in 1998 because this was the first time that crop prices were low
Participate in the          enough to cause large numbers of wheat, feed grain, and oilseed producers
                            to seek income from the program. USDA gave several reasons why
Program                     producers did not participate: (1) producers of eligible crops could not
                            receive a loan deficiency payment when the posted county price for the
                            crop equaled or was higher than the loan rate, (2) some producers had
                            sold their eligible crop before requesting financial assistance, and
                            (3) producers of other crops not specified by law as eligible, such as rye,
                            could not receive assistance.


Loan Deficiency Payments    Because the rate for loan deficiency payments is based on the amount by
Were Not Always Available   which the applicable county loan rate exceeds the posted county price,
                            payments are not available when the posted county price is at or above the
                            loan rate. Therefore, producers who sought a loan deficiency payment for
                            their harvested crop during a period when this condition was occurring
                            could not obtain a payment. For example, according to USDA officials, no
                            loan deficiency payments were available to producers of hard red winter
                            wheat in Texas between June and July 1998. Similarly, for producers of
                            durum wheat in North Dakota, loan deficiency payments were rarely
                            available because the posted county price was seldom below the loan rate
                            during 1998.


Producers Who Had Sold      Producers who had sold their crop could not participate in the program
Their Crop Before           because of its beneficial interest rules. After producers sell their crop, they
Requesting Assistance       no longer have a beneficial interest. Some producers had not understood
                            the implications of this provision in 1998 when they applied for assistance
Could Not Participate       under the program. As producers become more familiar with the
                            program’s beneficial interest provision, however, they are likely to find it
                            less of an obstacle to participation, according to USDA officials.


Program Assistance Was      Producers of crops other than those specified in the program are
Limited to Producers of     obviously not eligible for benefits. However, one of these crops, rye, was
Eligible Crops              covered by a commodity loan program before the 1996 Farm Bill. The 1996
                            Farm Bill did not include rye as an eligible crop.

                            USDAhas extended coverage to crops for 1999 that it had not allowed in
                            1998—hull-less oats and crambe, an industrial oilseed. According to USDA



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                     officials, hull-less oats were not eligible in 1998 because the crop was not
                     approved as a class of oats under the U.S. Official Grain Standards Act.
                     However, according to an agricultural extension service official at North
                     Dakota State University, hull-less oats are similar to traditional oats, which
                     are included in the program. USDA decided that because the approval
                     process is under way, the 1999 crops would be eligible. In 1998, crambe
                     was not eligible, but the Secretary of Agriculture, under his discretionary
                     authority for oilseeds, made it eligible for 1999.


                     The sudden increase in program payments starting in 1998 surfaced a
Sudden Increase in   number of concerns among farmers and program officials about
Program Payments     inconsistencies in the cash payments available to some producers but not
Surfaced Issues      to others and about the increased potential for loan forfeitures. First,
                     because of the process used to determine the rates for loan deficiency
Related to Program   payments—in particular, the relationship between the variables used to
Design               determine posted county prices and county loan rates—the rates for loan
                     deficiency payments were consistently higher in some counties than in
                     nearby or adjoining counties. As a result, some producers moved their
                     grain to a county with higher rates. In addition, for the most part, USDA has
                     not adjusted county loan rates for wheat and feed grains in a number of
                     years. Second, USDA has one loan rate for wheat but five separate posted
                     county prices—one for each class of wheat. The single loan rate for wheat
                     is a weighted average of the prices and acreage produced for the five
                     classes of wheat.7 However, some classes of wheat, such as durum in 1998,
                     have higher market prices and less production. As a result of the single
                     wheat loan rate and the five posted county prices, producers of classes of
                     wheat that have lower prices (such as soft white wheat in 1998) were able
                     to obtain a higher rate for loan deficiency payments than producers of
                     classes of wheat that have higher prices. Third, national loan rates for
                     some crops, such as soybeans, cover a significantly higher percentage of
                     the production costs than national loan rates for other crops. As a result,
                     producers have chosen to plant some crops over others in response to
                     government payments rather than to market signals. For example, the 1998
                     national loan rate for soybeans covered about 250 percent of the variable
                     costs of production while the loan rate for corn covered about 150 percent
                     of these costs. Finally, a $75,000 payment limitation was in place for cash
                     payments. USDA officials told us that because of the $75,000 payment
                     limitation, they were concerned that more producers would use the loan
                     option in 1999 to obtain financing and forfeit their collateral to the

                     7
                      The five classes of wheat include Durum, Hard Red Spring, Hard Red Winter, Soft Red Winter, and
                     Soft White.



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                          government once they reached the payment limitation. Any
                          program-related gains for producers that are associated with forfeiture are
                          not subject to the payment limitation. In this regard, USDA’s appropriations
                          act for fiscal year 2000 increased the payment limitation to $150,000 for
                          1999 crops .


Producers Sought Higher   Rates for loan deficiency payments differ significantly across the nation
Payments Across County    for producers of the same crop on a given day. That is, the loan deficiency
Lines                     payment rate, which is the amount the county loan rate exceeds the
                          posted county price, may be $0.18 per bushel for a crop in one county and
                          $0.29 per bushel for that same crop in an adjoining county. According to
                          USDA officials, producers, and grain elevator operators we spoke with,
                          when the rate for a loan deficiency payment in a nearby county was
                          higher, producers moved their crop to that county, ignoring their closer
                          markets and storage facilities. Figure 3 illustrates the differences in rates
                          for loan deficiency payments by county for corn on September 28, 1998.




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Figure 3: Nationwide Rates for Loan Deficiency Payments for Corn, September 28, 1998




                                                $0.18 to 0.28 per bushel

                                                $0.29 to 0.39 per bushel

                                                $0.40 to 0.50 per bushel



                                         Source: GAO’s analysis of USDA’s data.




                                         According to USDA, many of the differences in rates for loan deficiency
                                         payments have developed because USDA uses posted county prices (which
                                         change daily or weekly) and county loan rates (which are subject to
                                         change annually) in determining these rates. The differences in these rates
                                         are amplified because USDA has not adjusted most county loan rates for
                                         wheat and feed grains to reflect more recent relationships in market
                                         prices.




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In addition, according to USDA officials, posted county prices follow the
market by a day or a week, depending on the crop. For 1998, we found that
cash prices in the local market were higher than posted county prices by a
per-bushel average of $0.04 for wheat, $0.04 for corn, and $0.03 for
soybeans. However, posted county prices were significantly different from
local market conditions on occasion because USDA uses prices from
different terminal markets to determine posted county prices. In these
situations, these differences created incentives for producers to move
their crop to areas receiving higher rates for loan deficiency payments. For
example, in September 1998, the rate for a loan deficiency payment was
higher for corn in Minnesota than in nearby counties in Iowa. A producer
who transported corn to Minnesota would have received $.08 more per
bushel for corn. These particular variances occurred because USDA used
different terminal market prices for corn-producing counties in Minnesota
than it used for corn-producing counties in Iowa to determine posted
county prices.

Although the Secretary of Agriculture has the authority to adjust county
loan rates, USDA has generally not done so since 1995 because the demand
for loans prior to 1998 was low and because, more recently, it did not want
to lower loan rates during the current period of low crop prices. For
example, if USDA had adjusted all the county loan rates for wheat for 1999
on the basis of current market prices and production patterns—within the
national limits set by the Congress—the wheat loan rates would have
decreased in 1,979 of the 2,857 wheat-producing counties. Figures 4 and 5
show the changes that would have occurred if the wheat and corn loan
rates had been revised.




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Figure 4: Changes in Wheat Loan Rates If They Had Been Adjusted




                                                  $0.52 to 1.10 per bushel


                                                  -$0.08 to 0.51 per bushel


                                                  -$0.68 to -0.09 per bushel



                                        Source: GAO’s analysis of USDA’s data.




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Figure 5: Changes in Corn Loan Rates If They Had Been Adjusted




                                                   $0.01 to 0.13 per bushel


                                                   -$0.12 to 0.00 per bushel

                                                   -$0.25 to -0.13 per bushel



                                         Source: GAO’s analysis of USDA’s data.




                                         In response to the problem of producers’ choosing to market their crops in
                                         counties where the rates for loan deficiency payment are higher, USDA
                                         discussed the possibility of an alternative approach. Under this approach,
                                         the Secretary, acting within his authority, would establish a uniform rate
                                         for loan deficiency payments for each crop on a given day. However, USDA
                                         has not formally proposed this change. There are concerns that some




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                           producers would have lower loan deficiency payments and that
                           government costs could increase.


Producers of Wheat         In using the marketing assistance loan program, producers of wheat
Classes That Have Lower    classes that have lower prices could receive higher rates for loan
Prices Received Higher     deficiency payments than producers of wheat classes that have higher
                           prices within the same county. This is because USDA has one loan rate for
Loan Deficiency Payments   wheat, which is a weighted average of the market prices and acres
                           produced for the five classes of wheat, but five separate posted county
                           prices for each class of wheat—each with a different market value. Some
                           classes of wheat have higher market prices and less production. However,
                           as a result of the single loan rate for wheat and the five posted county
                           prices, producers of classes of wheat that have lower prices (such as soft
                           white wheat during 1998) may have been able to obtain higher rates for
                           loan deficiency payments than producers of classes of wheat that
                           generally have higher prices, such as durum. For example, throughout
                           1998, durum wheat producers in North Dakota were rarely eligible for loan
                           deficiency payments because the posted county prices were seldom below
                           the loan rate. In contrast, producers of other wheat varieties in North
                           Dakota received an average of $0.28 per bushel in loan deficiency
                           payments.

                           In response to this problem, USDA analyzed the impact of using a separate
                           county loan rate for each of the five classes of wheat. USDA has not
                           proposed any changes in the loan rates because some producers’ rates
                           would have declined substantially in many counties. Furthermore, USDA
                           did not want to adjust the wheat loan rates without adjusting loan rates for
                           other crops as well.


Producers Increased        As a result of differences in loan rates in relationship to crop production
Production of Soybeans     costs, according to USDA and producers, producers are choosing to grow
Because of USDA’s Higher   crops in response to available payments rather than in response to market
                           signals. According to USDA officials, soybean production increased
Guaranteed Price           4 percent in 1999, largely because of the higher net returns associated with
                           the relatively higher loan rate offered for this crop. This view is consistent
                           with interviews we held with producers and county officials.

                           USDA’s loan rates for different crops cover different percentages of
                           production costs because of differences in the congressionally mandated
                           limits on the national loan rates. For example, the national loan rate for



                           Page 16                          GAO/RCED-00-9 Marketing Assistance Loan Program
B-283795




soybeans covers significantly more of that crop’s production costs than do
the national rates for wheat and feed grains. Using the national average for
variable costs of production as a yardstick, the national loan rate for
soybeans covers about 250 percent of variable costs compared with the
national loan rates for wheat and feed grains, which cover 120 percent to
about 150 percent of variable costs. Figure 6 shows the differences in the
variable costs of production covered by the national loan rates for
soybeans; feed grains (corn, sorghum, oats, barley); wheat; upland cotton;
and rice. As figure 6 shows, none of the other crops has a loan rate
offering as high a level of price-to-cost guarantee as soybeans. Figure 6
also shows the differences in variable costs of production that would be
covered if the limits on the national loan rates were not in place. In order
to resolve these inconsistencies, legislation would be necessary. USDA has
not proposed any legislation to change the national loan limits to resolve
this problem, but USDA does support adjusting the national loan rates for
wheat and feed grains.




Page 17                         GAO/RCED-00-9 Marketing Assistance Loan Program
                                         B-283795




Figure 6: Percentage of Variable Costs
of Production Covered by the 1998        300    Percentage
National Loan Rates and the Additional
Percentage That Would Have Been
Covered If the 1998 National Loan        250
Rates Had Not Been Limited by
Legislation
                                         200



                                         150



                                         100



                                          50



                                           0
                                                   ns



                                                             rn




                                                                        t




                                                                                              ts




                                                                                                                      n



                                                                                                                              ce
                                                                                    um




                                                                                                          y
                                                                       ea




                                                                                                       rle



                                                                                                                  tto
                                                                                            Oa
                                                 ea



                                                         Co




                                                                                                                             Ri
                                                                     Wh



                                                                                rgh




                                                                                                      Ba



                                                                                                                 Co
                                                 yb




                                                                               So
                                               So




                                                             Additional percentage that would have been covered if the 1998 national loan
                                                             rate had not been limited by legislation.
                                                             Percentage of variable costs of production covered by the 1998 national loan
                                                             rate.



                                         Source: GAO’s analysis of USDA’s data.




Some Producers Reached                   According to USDA officials and producers we interviewed, because prices
Limits on Cash Payments                  had declined significantly in 1998, some producers reached the annual
                                         ceiling of $75,000 for cash payments. USDA county office officials told us
                                         that they expect even more producers to meet this payment limitation
                                         during crop year 1999. USDA officials told us they were concerned that
                                         when producers reach the payment limitation, they will take out loans and
                                         forfeit their collateral. Because such concerns also surfaced in the
                                         Congress, the $75,000 payment limitation was raised to $150,000 for 1999
                                         crops only with the passage of P.L. 106-78 (Oct. 22, 1999).


                                         Because of the dramatic decrease in crop prices in recent years, many
Conclusions                              producers, as would be expected, turned to the marketing assistance loan
                                         program as a source of guaranteed income, rather than as a source of
                                         interim financing at harvest—the program’s original, primary use when



                                         Page 18                                           GAO/RCED-00-9 Marketing Assistance Loan Program
                     B-283795




                     market prices for crops are lower and typically increase above the county
                     loan rate after harvest. As a result, the program has experienced a huge
                     increase in cost—a more than twentyfold increase between 1997 and 1998
                     crops. During this time, a number of implementation anomalies and
                     unintended consequences have emerged from several features of the
                     program’s design, such as the process for setting posted county prices and
                     the lack of adjustments to the loan rates by the Secretary of Agriculture to
                     reflect more recent market conditions. These interrelated causes have
                     resulted in marketing inefficiencies. The Secretary of Agriculture can
                     address some aspects of the problem with administrative action. Other
                     issues concerning the program’s design can only be addressed through
                     legislative changes.


                     To respond to the problems producers have encountered in using the
Recommendation to    marketing assistance loan program and to address the increased potential
the Secretary of     for loan forfeitures, we recommend that the Secretary of Agriculture
Agriculture          develop and implement administrative changes—or, if lacking authority to
                     do this, seek legislative changes from the Congress—to revise the program
                     to provide financing and price guarantees that better reflect market
                     conditions. These changes should address the following: (1) the process to
                     establish and update the national and local loan rates for each crop,
                     (2) the process to estimate local market prices, (3) the cost to the
                     government of these changes, and (4) the financial impact these changes
                     would have on producers in different regions of the country.


                     We provided a copy of a draft of this report to USDA for its review and
Agency Comments      comment. We met with officials from USDA’s Farm Service Agency,
                     including the Assistant Deputy Administrator for Farm Programs. These
                     officials generally agreed with the information provided in our report and
                     with the report’s conclusions and recommendation. The agency officials
                     provided technical changes to the report, which we incorporated as
                     appropriate.


                     To determine which producers benefited from the program, by type of
Objectives, Scope,   crop and state, we reviewed USDA’s files on marketing assistance loans and
and Methodology      loan deficiency payments. To determine why producers did not participate
                     in the program, we interviewed USDA officials and producers.




                     Page 19                          GAO/RCED-00-9 Marketing Assistance Loan Program
B-283795




To assess the issues related to the program’s design, we interviewed USDA
officials, producers, and grain elevator operators and analyzed data on
county loan rates, posted county prices, loan deficiency payments, and the
costs of producing crops.

We performed our work at USDA headquarters, the Kansas City Commodity
Office, USDA’s Farm Service Agency, state and county offices in North
Dakota and Texas, and the state office in Iowa. These states were selected
because their producers are major producers of eligible crops, such as
wheat, feed grains, upland cotton, and oilseeds, and because they have a
large number of program participants.

We performed our review from November 1998 through October 1999 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to Senator Richard A. Lugar,
Chairman, and Senator Tom Harkin, Ranking Minority Member, Senate
Committee on Agriculture, Nutrition, and Forestry; Representative Larry
Combest, Chairman, and Representative Charles W. Stenholm, Ranking
Minority Member, House Committee on Agriculture; and other appropriate
congressional committees. We are also sending copies of this report to the
Honorable Dan Glickman, the Secretary of Agriculture. Copies will also be
made available to others upon request.

Please contact me at (202) 512-5138 if you or your staff have any questions
about this report. Key contributors to this report are listed in appendix I.

Sincerely yours,




Lawrence J. Dyckman
Director, Food and
  Agriculture Issues




Page 20                          GAO/RCED-00-9 Marketing Assistance Loan Program
Page 21   GAO/RCED-00-9 Marketing Assistance Loan Program
Appendix I

GAO Contacts and Staff Acknowledgments


                  Lawrence J. Dyckman (202) 512-5138
GAO Contacts      Ronald E. Maxon, Jr. (913) 384-7400


                  In addition to those named above, Dale A. Wolden, Fred Light, Jay L. Scott,
Acknowledgments   and Carol Herrnstadt Shulman made key contributions to this report.




(150095)          Page 22                         GAO/RCED-00-9 Marketing Assistance Loan Program
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