oversight

1990 Farm Bill: Opportunities for Change

Published by the Government Accountability Office on 1990-04-10.

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

                   United   States   General   Accounting   Office

GAO            I   Report to the Congress




April   1990
                   1990 FARM BILL
                   Opportunities for
                   Change




GAO/RCED-90-142
GAO
      United States
      General Accounting Office
      Washington, DE. 20548

      Comptroller   General
      of the United States

      B-238782

      April    lo,1990

      To the President of the Senate and the
      Speaker of the House of Representatives

      The 1990 farm bill is one of the most significant pieces of legislation to
      be developed this year. Revised about every 5 years, the farm bill gov-
      erns $40 billion to $50 billion in annual federal spending and affects vir-
      tually all aspects of the nation’s economy, including international trade,
      the environment, rural development, and domestic social welfare.

      The farm bill establishes policies and programs to ensure the provision
      of a safe, reliable, and affordable food supply. The heart of the farm bill
      is the farm program, which uses many methods-including        nonrecourse
      loans, government purchases, direct payments, planting allotments, and
      marketing quotas -to support and stabilize commodity prices and pro-
      ducer incomes for certain commodities. These methods originated in leg-
      islation developed during the Great Depression and in the Agricultural
      Act of 1949.

      This report addresses issues that we believe the Congress should con-
      sider during the debate over the farm bill. It contains 25 brief discus-
      sions that raise issues for congressional consideration. Each discussion
      follows the same format: a short identification of the issue; some back-
      ground information; an analysis of the issue; and a suggestion for con-
      gressional consideration, with a reference to one or more GAO reports or
      testimonies for more information.

      The information in this report is based on nearly 250 food and agricul-
      ture products we have issued since the last farm bill. We analyzed these
      reports to identify the issues that are still relevant for the current farm
      bill debate. In some cases, data were updated to reflect program
      changes. Several issues are also based on ongoing work on which we
      have not yet reported.

      The major program areas covered in this report are (1) commodity price
      and income supports, (2) farm finance, (3) crop disaster assistance,
      (4) conservation and environmental programs, (5) international pro-
      grams, (6) food stamps, and (7) U.S. Department of Agriculture (USDA)
      management. These are many of the same issues the Administration
      addresses in its report, 1990 Farm Bill: Proposal of the Administration.




      Page 1                                           GAO/RCED90-142   1990 Farm Bill
                        B-238782




                        High on any farm bill agenda should be major changes to price and
Report Highlights       income support programs-by      eliminating some programs and restruc-
                        turing others-to encourage greater opportunities for marketing; and an
                        overhaul of the way farm credit and agricultural disaster assistance,
                        especially crop insurance, are provided to farmers. More specifically:

                    l    For price and income support programs, government support can be
                         eliminated in the honey program and the wool and mohair program. In
                         addition, production incentives can be phased out in the dairy program.
                        Other programs-cotton       and the major grain commodities-can be mod-
                         ified to emphasize marketing opportunities more and federal subsidies
                         less. In addition, the Congress can set grain stock goals and ensure vigor-
                        ous enforcement of the $50,000 payment limitation. (See sec. 1.)
                    l    For farm finance programs, the Congress needs to resolve issues con-
                        cerning the Farmers Home Administration’s (F~HA) role and mission.
                        The Congress expects F~HA to continue to assist financially stressed
                        farmers. As a result, FIIJHAis increasingly acting as a continuous source
                        of credit. These conditions raise fundamental questions about FIIJHA’S
                        mission to serve as a temporary source of credit while fulfilling its role
                        as a lender of last resort. (See sec. 2.)
                    l   For crop disaster assistance programs, the Congress can rely on a
                        strengthened crop insurance program, without competition from direct
                        payment and loan programs, to provide disaster assistance to farmers
                        more effectively and efficiently. (See sec. 3.)
                    l   For conservation and environmental programs, the Congress can make
                        several program changes in its conservation programs to place more
                        highly erodible land in the programs. (See sec. 4.)
                    l   For international programs, the Congress can encourage USDA to make a
                        stronger commitment to international marketing opportunities and use
                        the Export Enhancement Program selectively; combine the market
                        development programs; and clarify export credit guarantee and Public
                        Law 480 food assistance program policies. (See sec. 5.)
                    l   For the Food Stamp Program, the Congress can take a number of actions
                        to improve access to food stamps. It should also consider eliminating
                        enhanced funding for state food stamp automation. (See sec. 6.)
                    l   In addition, the Congress can help USDA manage its programs more effec-
                        tively. As a first step, the Congress needs to reexamine how USDA is
                        organized to carry out its marketing responsibilities and deliver services
                        to farmers. Important management changes can also be made to
                        (1) improve the accuracy of commodity program budget forecasts,
                        (2) provide more efficient service delivery by using automated technolo-
                        gies better, and (3) develop budgetary reforms to enhance program
                        oversight. (See sec. 7.)


                        Page 2                                           GAO/‘RCJ3D9&142   1990 Farm Bill
      B-238782




      The Congress faces a major task in its work on this year’s farm bill. It
      must assign priorities and evaluate trade-offs among a broad array of
      food and agriculture policies and programs. To a large degree, the eco-
      nomic health of the food and agriculture sector depends on the outcome
      of the ongoing debate. We believe that the issues raised for congres-
      sional consideration in this report will help the Congress sort through
      the difficult choices that lie ahead.

       In addition, while debate on the 1990 farm bill is in progress, the current
       round of multilateral trade negotiations is in its last year. If an agree-
       ment is reached that liberalizes agricultural trade, the Congress will
       have to reassess many farm bill programs.

       We did not obtain formal agency comments on this report because it is
       based primarily on issued reports and testimonies.

       We are sending copies of this report to the appropriate House and Sen-
       ate committees and subcommittees; interested members of the Congress;
       the Secretary of Agriculture; the Office of Management and Budget; and
       other interested parties.

       The report was prepared between January and March 1990 under the
       direction of John W. Harman, Director, Food and Agriculture Issues,
       who may be reached at (202) 275-5138.




P VComptroller
   Charles A. Bowsher
                General
   of the United States




       Page 3                                           GAO/RCED9&142   1990 Farm Bill
Contents



Letter                                                                                             1

Section 1                                                                                          6
Price and Income     Developing a More Market-Oriented Dairy Industry                              6
                     Reevaluating the Need for the Wool and Mohair Program                         7
Support Programs     Accelerating the Phaseout of the Honey Price-Support                          8
                          Program
                     Keeping U.S. Cotton Competitive on World Markets                            10
                     Tightening Sugar Import Loopholes                                           12
                     Making Program Crop Planting More Flexible                                  14
                     Enforcing the $50,000 Payment Limit                                         15
                     Establishing Goals and Policies for Grain Stock Levels                      16

Section 2                                                                                        18
Farm Finance         Reevaluating FmI-IA’s Role and Mission                                      18

Section 3                                                                                        21
Crop Disaster        Providing Disaster Assistance Better Through Crop                           21
                         Insurance
Assistance Program
Section 4                                                                                        23
Conservation and     Making the Conservation Reserve Program More                                23
                         Effective
Environment          Expanding Conservation Compliance for Environmental                         25
                         Benefits

Section 5                                                                                        26
Internation .a1      Enhancing USDA’s Commitment to Marketing                                    27
                     Continuing to Use the Export Enhancement Program                            28
Programs                  More Selectively
                     Combining the Targeted Export Assistance and                                30
                          Cooperator Programs
                     Controlling Export Credit Guarantee Programs Better                         32
                     Clarifying Accountability Over P.L. 480 Local Currencies                    34

Section 6                                                                                        37
Food Stamp Program   Providing Full Food Stamp Benefits After Late                               37
                         Applications Are Received



                     Page 4                                          GAO/ltCED-B&l42   1990 Farm BUI
             Contenta




             Discontinuing the 75-Percent Funding Level for Food                          38
                 Stamp Automation
             Targeting Food Stamp Outreach Better                                         40


Section 7
Management   Improving the Accuracy of C2xtunodity Program Budget
                 Forecasts
                                                                                          42

             Accurately Tracking Costs of the Commodity Certificate                       44
                 Program
             Reducing the Cost of USDA’s Farm Service Delivery                            45
                 System
             Providing More Planning Time for Developing Automated                        47
                 Systems
             Improving Program Management Through More Data-                              48
                 Sharing




             Abbreviations

             AID         Agency for International Development
                         Agricultural Stabilization and Conservation Service
             CCC         Commodity Credit Corporation
             FIllHA      Farmers Home Administration
             USDA        U.S. Department of Agriculture


             Page 5                                           GAO/RCEDW142     1990 Farm Bill
Section 1

Price and Income Support Programs


                        A more market-oriented approach can balance dairy production with
Developing a More       demand better than do current federal dairy policies.
Market-Oriented Dairy
Industry

Background              Federal dairy policy is designed to support producers’ prices and
                        incomes, expand consumption, ensure an adequate supply of good qual-
                        ity milk, and stabilize dairy prices and markets. Two programs-milk
                        marketing orders and dairy price supports-are       the principal federal
                        policies for this industry. Milk marketing orders regulate grade A milk
                        pricing and other marketing practices in the areas of the United States
                        where producers have voluntarily adopted them. The price-support pro-
                        gram stabilizes milk prices by, in effect, guaranteeing a minimum price
                        for any amount of certain dairy products that can be produced.


Analysis                The federal government first developed dairy policies when low milk
                        prices appeared to threaten the adequacy of the nation’s milk supply.
                        The government acted to stabilize milk prices and encourage milk pro-
                        duction. Over the last 60 years, however, milk production efficiency has
                        greatly increased, resulting in large and costly government purchases of
                        surplus dairy products. In addition, the price-support and milk market-
                        ing order programs have contributed to periodic surpluses by creating
                        incentives to produce more milk than can be marketed at prevailing
                        prices. During the 198Os, excessive milk production resulted in the gov-
                        ernment’s purchasing over $17 billion of surplus dairy products, peak-
                        ing at $2.6 billion during 1983.

                        Consequently, government policies during the 1980s have been primar-
                        ily directed toward curbing milk production: reducing price-support
                        levels, or paying producers to slaughter or export their entire herd and
                        leave dairying for 5 years. Federal dairy surpluses have declined so
                        much that traditional donation programs have little or no dairy products
                        to give. In addition, the significant increases in dairy retail prices that
                        occurred during 1989 have caught consumers’ attention. These prices,
                        which rose only 2 percent annually in the mid- and late 198Os, increased
                        by 6 percent in 1989. GAO has concluded that efforts to control surpluses
                        by paying producers to leave dairy farming or to reduce production
                        would have no lasting effect.




                        Page 6                                           GAO/ICED-90-142   1990 Fame Bill
                        Section 1
                        Price and Income Support   Programs




Suggestions for         A more market-oriented approach to dairy programs would provide a
Congressional           more lasting solution to periodic dairy surpluses and reduce federal
                        expenditures. Therefore, the Congress should reduce federal involve-
Consideration           ment in an orderly way by phasing out the production incentives of the
                        milk marketing order program while continuing the use of a supply/
                        demand adjuster (which automatically reduces price supports if sur-
                        pluses are projected to exceed certain levels) to set price-support levels.

                        For more information, see Federal Dairy Programs: Insights Into Their
                        Past Provide Perspectives on Their Future (GAO/RCEDSWB, Feb. 28,
                        1990).


                        The Congress should reevaluate the need to continue the wool and
Reevaluating the Need   mohair program because its subsidy costs are high and it has not had
for the Wool and        any significant achievements.
Mohair Program

Background              The government established a wool and mohair price-support program
                        in 1954, following a decade of dramatic decline in the U.S. sheep indus-
                        try. Essentially, the program was established to encourage domestic
                        wool production in the interest of national security. At the time, wool
                        was considered a strategic material for the military. The program’s
                        other objectives were to encourage a viable domestic wool industry, a
                        positive balance of trade, and the efficient use of the nation’s resources.


Analysis                Industry representatives and current studies contend that the wool pro-
                        gram has assured producers of continued income, stabilized the indus-
                        try, and helped slow the decline in wool production. Between 1955 and
                        1988, the program provided wool and mohair producers with about $2
                        billion. Approximately 115,000 wool and 12,000 mohair producers par-
                        ticipate in the program, but the U.S. Department of Agriculture (USDA)
                        reports that about 6,000 producers receive nearly 80 percent of all
                        payments.

                        GAO       initially questioned the program’s effectiveness in 1982, finding
                        that, despite $1.1 billion in wool payments from 1955 to 1980, U.S. wool
                        production declined from 283 million to 106 million pounds. The wool
                        program slowed the production decline and supported producers’
                        incomes, but at a very high cost. In 1980 alone, the federal government



                        Page 7                                                GAO/‘RCED9Wl42   1990 Farm Bill
                        Section 1
                        Price and Income Support   PX@YUM




                        spent between $2.63 to $6.01 a pound to encourage increased produc-
                        tion; but that year’s average market value for wool was only $0.88 a
                        pound.

                        GAO’S  March 1990 evaluation of the program indicates that it is still not
                        effective. Domestic wool production has continued to decline, reaching
                        all-time lows in the mid-1980s. And the program’s cost for additional
                        wool output in 1988-according to GAO estimates-was $3.04 a pound,
                        while the average market price was only $1.38 a pound. In addition,
                        wool has not been classified as a strategic material since 1960.

                        The mohair program’s justification is even more questionable because it
                        has never had any specific objectives. Nevertheless, mohair producers
                        received $47.1 million (53 percent) of the total 1988 wool and mohair
                        program payments; wool producers received the balance of $41.4
                        million.


Suggestions for         The Congress should reconsider the need for the wool and mohair pro-
Congressional           gram. Although it has stabilized income and helped slow production
                        declines, the program is expensive and can no longer be justified for
Consideration           national security reasons. Program costs vary yearly, but program ter-
                        mination in 1988 would have saved the government $88.5 million.

                        For more information, see Congressional Decision Needed on Necessity
                        of Federal Wool Program (GAO/CED-82-86, Aug. 2,1982), and Wool and
                        Mohair Program: Need for Program Still in Question (GAoficEn-90-51,Mar.
                        6, 1990).


                        The Honey Price-Support Program should be phased out by accelerating
Accelerating the        reductions in the price-support program and legislatively mandating a
Phaseout of the Honey   termination date.
Price-Support Program

Background              The U.S. honey program is designed to stabilize prices and maintain suf-
                        ficient bee populations for pollinating food and fiber crops. Since 1952,
                        USDA has used nonrecourse loans to support honey prices at between 60
                        and 75 percent of parity. The program supports relatively few produc-
                        ers. Presently, 2,000 commercial beekeepers-those who own 300 or
                        more colonies-produce     60 percent of the annual average of 200 million



                        Page 8                                          GAO/‘RCED9@142   1990 Farm Bill
                  section 1
                  price and Income Support   Prolpams




                  pounds of honey. An additional 10,000 people are part-time beekeepers
                  (with 25 to 299 colonies), and 200,000 are hobbyists with under 25 colo-
                  nies. Approximately 1 percent of all beekeepers-mostly    commercial
                  producers-participate    in the program.


Analysis          The honey program is no longer needed to ensure crop pollination
                  because producers of crops requiring pollination have ready access to
                  bees through rental and ownership. In addition, since the program
                  began, beekeepers have generally emphasized honey production over
                  crop pollination, The principal purpose of the honey program now is to
                  support beekeepers’ incomes, according to USDA.

                  Before 1985, the legislated price-support formula resulted in a higher
                  support price than both the import and domestic market price, which
                  encouraged producers to forfeit honey (under the nonrecourse loan pro-
                  visions) and caused imports to rise. Program costs increased from virtu-
                  ally zero during the 1970s to $164 million between 1980 and 1983.

                  Legislative changes in 1985 eliminated the mandatory parity formula;
                  established progressively lower support prices; and authorized a lower
                  loan repayment option, at the discretion of the Secretary. The Secretary
                  instituted lower loan repayment options from 1986 through 1989. As a
                  result, government honey acquisitions and imports declined.

                  However, program costs remained high because high support prices
                  induced increased production. After initially declining through 1987,
                  government costs increased to about $100 million in 1988, largely
                  because of the largest honey crop in 5 years. Honey production will
                  probably remain at a relatively high level because the price-support pro-
                  gram still provides a very strong incentive.

                  In 1985, GAO recommended that the Congress repeal the Honey Price-
                  Support Program and direct the Secretary of Agriculture to reduce the
                  price support incrementally to ensure an orderly phaseout of the pro-
                  gram. At the time, USDA agreed that the Congress should eliminate the
                  program.


Suggestions for   Nothing has changed since our earlier report to cause us to reconsider
Congressional     our recommendation. The program still serves little public purpose but
                  to raise the income of relatively few producers at a high cost to the pub-
Consideration     lic. Legislatively mandating a termination date for the honey program


                  Page 9                                          GAO/EKED-90-142   1990 Farm Bill
                       Section 1
                       Price and Income Support    Progrm~




                       would save as much as $40 million to $100 million annually, depending
                       on the size of the honey crop.

                       For more information, see Federal Price Support for Honey Should Be
                       Phased Cut (GAO/RCED~~-107, Aug. 19, 1985).


                       The Congress should consider lower loan rates and greater administra-
Keeping U.S. Cotton    tive flexibility to keep US. cotton competitive in world markets.
Competitive on World
Markets

Background             Under the cotton program, producers may pledge their cotton as collat-
                       eral for a nonrecourse loan-which     means that they can forfeit their
                       cotton in lieu of paying back the loan. Eligible cotton producers are enti-
                       tled to a lo-month nonrecourse loan, and 8-month extensions are rou-
                       tinely granted. The nonrecourse loan program-because         it effectively
                       provides a minimum price for cotton-allows       producers to keep cotton
                       under loan for up to 18 months with little financial risk. The 1985 farm
                       bill introduced a new loan repayment plan-known         as the marketing
                       loan-that    permits producers to repay their loans at world market
                       prices whenever those prices are less than the nonrecourse loan rate.
                       The marketing loan is intended to keep U.S. cotton competitive in world
                       markets by encouraging producers to redeem their loans and market
                       their cotton when world prices are low. It is critical that U.S. cotton
                       remains competitive because historically about one-half of U.S. cotton
                       consumed is through exports. The entire cotton program costs about
                       $1.5 billion annually.


Analysis               The marketing loan program appeared to achieve its intended effect
                       when it began in 1986. That year, U.S. cotton-which      had previously
                       been priced higher than world cotton-became competitive when U.S.
                       and world market prices dropped dramatically below the nonrecourse
                       loan rate and producers could redeem their loans at the lower price.]
                       Cotton exports rebounded to their previous levels, and 1986 year-ending
                       inventories were reduced to 4.9 million bales, close to the $-million bale


                       ‘For the most part, producers were permitted in 1986 to redeem their loans at less than the world
                       market price. USDA has since required producers to redeem their loans at the world price when the
                       marketing loan is in effect.



                       Page 10                                                         GAO/RCED-90-142     1990 Farm Bill
                      Se&on     1
                      Price and Income support   Programs




                      target level established under the 1985 farm bill. Because of this suc-
                      cess, USDAand the cotton industry concluded that the marketing loan
                      program was accomplishing its objectives.

                      This judgment was premature, however. U.S. and world cotton prices
                      diverged in crop years 1987 and 1988, with US. prices exceeding world
                      prices by as much as 10 cents a pound. As a result, U.S. cotton was no
                      longer competitive in world markets. Under these conditions, and
                      because 50 percent of U.S. production is for export, U.S. producers had
                      little incentive to sell cotton at the world price because they would have
                      received the same price regardless of whether they redeemed and sold
                      their cotton at the world price or forfeited it to the government. Conse-
                      quently, they held their cotton under loan.

                      Two conditions allowed the divergence of domestic and world prices to
                      occur. First, domestic textile mills, for the most part, are prohibited
                      from importing cotton, so U.S. prices are insulated from declines in the
                      world price. Second, because producers can routinely obtain l&month
                      nonrecourse loans, they are likely to hold their cotton off the market for
                      that period in case world market prices rise above the loan rate.

                      Because cotton producers generally kept their cotton under loan and
                      waited for better market conditions, U.S. cotton inventories at the end of
                      crop year 1988 were over 7 million bales, nearly double the carryover
                      level established under the 1985 farm bill.


Suggestions for       The Congress should consider taking the following actions to ensure that
Congressional         U.S. cotton remains competitive in world markets and to help reduce
                      government costs:
Consideration
                  . Lower the nonrecourse loan rate to a level below market prices to ensure
                    that producers retain some equity in their pledged collateral. This action
                    would provide producers with a lower support price; they therefore
                    would have less incentive to (1) keep their cotton under loan for an
                    extended time or (2) forfeit it to the government. U.S. cotton would then
                    compete more readily in world markets,
                  l Provide the Secretary of Agriculture with discretionary authority to
                    grant 8-month extensions of the nonrecourse loan only when warranted
                    by adverse market conditions. This flexibility would lessen producers’
                    incentive to hold cotton under loan for extended periods or to forfeit
                    their cotton to the government.



                      Page 11                                         GAO,‘RCED9l%142   1990 Farm Bill
                   section 1
                   F’rice and Income Support   Programa




                   For more information, see GAO’S report on the cotton program, to be
                   issued in Spring 1990.


                   If the Congress continues the sugar price-support program, it should
Tightening Sugar   prevent importers from taking advantage of loopholes in the sugar
Import Loopholes   quota system and tariff schedule when importing sugar-containing
                   products.


Background         The current U.S. sugar program continues a trade policy initiated in the
                   early 1900s. The federal government protects domestic sugar production
                   and prices by limiting the quantity of foreign sugar available on the U.S.
                   market. The 1988 quota was allocated to 39 countries that supplied
                   sugar to the United States between 1975 and 1981. Other countries use
                   similar policies to insulate domestic sugar producers from fluctuating
                   world market conditions. The United States also operates a
                   price-support system for sugar that provides a floor under the world
                   market price.


                   The sugar program is controversial. Proponents claim that the program
                   benefits domestic sugar producers without imposing a financial burden
                   on the federal government, but critics claim that the program causes
                   artificially high prices for consumers. Critics also contend that import
                   quotas harm the economies of lesser developed countries and encourage
                   additional domestic production. GAO plans to evaluate the merits of the
                   sugar program in the near future.

                   In the current round of multilateral trade negotiations, the United States
                   is calling for the elimination of all agricultural subsidies, including those
                   for sugar. The U.S. sweeteners advisory group, which is made up of
                   industry representatives, supports this position, provided that other
                   sugar-producing countries eliminate their protectionist policies.

                   Until the negotiations are completed, the United States needs to ensure
                   that the existing program works successfully. In particular, the Con-
                   gress needs to prevent importers from circumventing the sugar quota
                   system when importing sugar-containing products.

                   In 1986, between 265,000 to 307,000 tons of sugar may have displaced
                   domestic sugar by entering the United States in sugar-containing prod-
                   ucts under 46 tariff categories. This amount is more than twice that


                   Page 12                                          GAO,‘BCED-9@142   1990 Farm Bill
                  Section 1
                  Price and Income Support   Programa




                  imported in 1982. For some products, the increases were much greater.
                  For example, imports of bulk sweetened chocolate bars and certain gela-
                  tin mixes increased more than tenfold from 1982 to 1986. One reason for
                  such increases is the complex U.S. tariff schedules. These allow
                  resourceful businesses to “tailor” sugar-containing products to fit under
                  different tariff classifications. Some classifications are subject to quotas
                  but others are not. Furthermore, duties can also vary by tariff
                  classification.

                  In addition, Customs paperwork controls and enforcement efforts in
                  some free trade zones were not always sufficient to ensure compliance
                  with Customs laws and regulations. These zones are secured areas geo-
                  graphically inside the United States but legally outside Customs terri-
                  tory where companies are authorized to bring in merchandise to be
                  stored, distributed, mixed with other foreign and domestic merchandise,
                  or used in manufacturing operations. Of the additional sugar that
                  entered U.S. commerce in sugar-containing products in 1986, about
                  40,000 tons were in products blended in these zones. The rest was in
                  products imported through ports of entry.

                  To prevent importers from taking advantage of import loopholes, the
                  Administration should extend import restrictions, via import quotas or
                  fees, to additional sugar-containing products. Such an action should
                  include a comprehensive analysis of all sugar-containing products, care-
                  fully describing the products to avoid creating new loopholes.


Suggestions for   To help ensure the proper entry of sugar-containing products, the Con-
Congressional     gress should continue to oversee Customs’ actions to improve free trade
                  zone administration. The Congress should also rewrite tariff schedule
Consideration     descriptions so that existing loopholes are closed and the creation of
                  new loopholes is avoided.

                  For more information, see Sugar Program: Issues Related to Imports of
                  Sugar-Containing Products (GAOIRCED-88-146, June 22, 1988) and the
                  House Subcommittee on Cotton, Rice, and Sugar hearing, Review of Gen-
                  eral Accounting Office Report “Sugar Program: Issues Related to
                  Imports of Sugar-Containing Products; and Impact on the U.S. Sugar
                  Program” (Serial No. 100-79, June 22 and 28,1988).




                  Page 13                                          GAO/RCED-90-142   1990 Farm Bill
                         Section 1
                         Price and Income Support   Programa




                         Current practices to control production need to be made more flexible so
Making Program Crop      farmers can respond better to market opportunities.
Planting More Flexible

Background               Farmers qualifying for federal price- and income-support benefits-
                         available to wheat, corn, barley, sorghum, oats, cotton, and rice produc-
                         ers-must establish crop acreage bases. Each farm’s acreage base gener-
                         ally represents the S-year average of the acreage planted for each crop.
                         USDA recomputes each farm’s acreage base annually. To limit the amount
                         of program crops planted, USDArequires farmers, as a condition for pro-
                         gram participation, to plant only a portion of their crop acreage base.


Analysis                 To retain eligibility for the full amount of benefits, farmers usually must
                         plant the maximum amount of acres they are allowed with their pro
                         gram crop. Otherwise, the amount of program payments farmers receive
                         the next year could be reduced. For example, if a farmer with a loo-acre
                         base for corn chose to plant that land with soybeans, the farmer’s corn
                         acreage base would be reduced to 80 acres the next year because of
                         averaging. That is, the farmer would be eligible to receive only 80 per-
                         cent of the program benefits he or she was entitled to when the base
                         acreage was 100 acres.

                         These program rules discourage farmers from planting alternative
                         crops, even when planting other crops in a particular year might make
                         more economic sense. Farmers are thus limited in their ability to
                         respond to changes in the commodity marketplace. These rules also
                         deter farmers from rotating different crops on their fields, which is an
                         environmentally preferred farm conservation practice.

                         As a result, Corn Belt producers lost a good marketing opportunity in
                         1988 when they did not react to market signals that suggested a switch
                         to soybeans would yield higher market returns than corn. Corn produc-
                         ers did not switch crops because of the relatively high government sub-
                         sidies for corn production and the need to maintain their corn base
                         acreage. Consequently, the United States ended up with too much corn
                         and not enough soybeans. Some analysts asserted that the farm program
                         rules cost the United States significant opportunities to export soybeans,
                         which encouraged major soybean competitors, such as Brazil and Argen-
                         tina, to increase their soybean production and their world market share.




                         Page 14                                         GAO/TtCED-BCb14!2 1990 Farm Bill
                        Section 1
                        Price and Income Support   Programs




Suggestions for         The Congress should develop more flexible commodity programs, which
Congressional           would still retain USDA'S ability to influence crop production, to help
                        farmers take advantage of marketing opportunities. More flexible pro-
Consideration           grams that are not tied so rigidly to maintaining base acreage would
                        help reduce the influence of government payments on farmers’ produc-
                        tion decisions and federal expenditures for farm programs, and promote
                        environmentally sound farming practices.

                        For more information, see Agriculture: Progress Made Toward Goals of
                        1985 Farm Bill (GAO/RCED89-76BR, Mar. 30, 1989) and Transition Series:
                        Agriculture Issues (GAO/OCG439-12TR, Nov. 1988).


                        Until the reason for the payment limit’s ineffectiveness is identified, the
Enforcing the $50,000   Congress should ensure that USDAenforces the $50,000 payment limit as
Payment Limit           vigorously as current law permits.


Background              In response both to the high cost of federal farm programs and to
                        reports of large subsidy payments to individual producers, the Congress
                        established in 1980 an annual $50,000-per-person limit for certain defi-
                        ciency and land diversion payments to wheat, feed grains, cotton, and
                        rice producers. Since then, it has been relatively easy for farmers to cir-
                        cumvent the $50,000 payment limit by reorganizing their farming opera-
                        tions-creating    corporations, partnerships, joint ventures, or leasing
                        arrangements-to      increase the number of “persons” who can receive
                        payments. Farmers nearing the payment limit had an economic incen-
                        tive to reorganize and add new persons, who could qualify for up to
                        $50,000 per person, to their farming operations. GAO estimated in 1987
                        that if the reorganization trend continued, 31,300 additional persons
                        would be receiving payments by 1989 and total costs would increase by
                        an additional $2.3 billion between 1984 and 1989.


Analysis                To tighten up the $50,000 payment loopholes, the Congress amended the
                        1985 farm bill’s $50,000 payment limit provisions in 1987. These new
                        provisions, effective for the 1989 crop year, capped the number of new
                        “persons” by limiting payments to (1) individuals participating in no
                        more than three entities and (2) individuals and entities actively
                        engaged in farming.

                        A recent USDA Inspector General audit, however, found that these provi-
                        sions, and USDA'S implementing regulations, did not effectively curtail


                        Page 15                                         GAO/‘RCED9%142   1990 Farm Bill
                              Section 1
                              Price and Income Support   Programs




                              farm reorganizations.* The audit reviewed 241 farm operating plans for
                              52 farming operations but did not identify any reduction in projected
                              total program payments because of the 1989 payment limitation
                              changes. Therefore, the report concluded that the 1987 amendments will
                              not significantly limit program payments.

                              Capping farm program payments at $50,000 has proven to be an elusive
                              goal. Deficiencies in the recent legislative amendments or in USDA’S
                              implementing regulations have contributed to difficulties in enforcing
                              this payment limit. GAO is evaluating these provisions to determine the
                              cause of the problem, and will present its findings to the Congress at a
                              later date.


Suggestions for               Until the causes for circumvention are identified, the Congress should
Congressional                 ensure that USDA enforces the $50,000 payment limit as vigorously as
                              current law permits.
Consideration
                              For more information, see Farm Payments: Basic Changes Needed to
                              Avoid Abuse of the $50,000 Payment Limit (GAO/RCED-87-176, July 20,
                              1987).



Establishing Goals and National
                       federal   goals and policies
                                grain stocks.                       are needed to improve the management of

Policies for Grain
Stock Levels

Background                    The federal government acquires its grain stocks largely as forfeited col-
                              lateral under the nonrecourse loan programs, one of several programs
                              designed to stabilize farm prices. Under the program, USDAprovides
                              farmers with loans for wheat, corn, and certain other farm commodities,
                              and gives them the option of repaying the loan at any time (with inter-
                              est) or forfeiting the commodity to the government in full payment for
                              the loan. Farmers are more inclined to forfeit their grain when market
                              prices are lower than loan rates.




                              ‘See Agricultural Stabilization and Conservation Service: Implementation of 1987 Farm Program Pay-
                              ment Integrity Act (Audit Report No. 036004-Te, Sept. 29,1989).



                              Page 16                                                        GAO,‘RCED90-142     1990 Farm Bill
                  Section 1
                  Price and Income   Support   Programs




Analysis          When it acquires grain stocks, the government faces significant storage
                  and sales challenges. For example, rising loan forfeitures caused USDA'S
                  grain inventories to increase from 1 billion to 3.2 billion bushels between
                  fiscal years 1985 and mid-1987. These grain inventories were so large
                  that USDA had to store grain on barges in 1986, and the inventories
                  increased USDA'S annual storage, handling, and transportation costs over
                  300 percent, from $353 million to $1.4 billion between fiscal years 1985
                  and 1987.

                  Concerned about rising costs, the Congress in 1987 directed USDA to
                  reduce projected commercial storage, handling, and transportation
                  expenditures for federal inventories by $230 million for fiscal years
                  1988 and 1989. To comply, USDA increased grain sales, which reduced its
                  grain inventories from about 3 billion bushels to about 1 billion bushels
                  between fiscal years 1987 and 1989. USDA encouraged grain sales by
                  attempting to set its prices at or below the local market price at virtu-
                  ally every grain storage location. In addition, the 1988 drought-one      of
                  the century’s worst-contributed     to corn and wheat production declines
                  from 1987 levels of 30 and 14 percent, respectively. Consequently, the
                  sales may have helped to moderate the impact that the drought could
                  have had on the availability and price of grain.

                  Grain inventory sales in the 1980s raise questions about whether farm
                  support programs should be modified to avoid accumulating large inven-
                  tories and whether minimum and maximum grain target levels should be
                  established. In addressing these questions, the Congress may ultimately
                  need to establish grain stock goals. Federal grain stocks serve several
                  purposes, including providing a cushion against times when production
                  is not adequate to meet the nation’s food requirements. These goals,
                  however, have not been translated into actual grain target levels. With-
                  out these targets, it is difficult to develop policies to effectively and effi-
                  ciently manage grain stocks.


Suggestions for   To meet grain stock goals or to prevent accumulations of excessive
Congressional     inventories, the Congress should consider modifying incentives in the
                  nonrecourse loan program. The loan rate, for example, could be adjusted
Consideration     to the level of grain stocks so that government payments are reduced
                  when grain stocks become too high, and vice versa. The dairy program’s
                  supply/demand price adjuster uses a similar mechanism.

                  For more information, see U.S. Grain Stocks: Inventory Sales Raise
                  Issues for Legislative Consideration (GAO-RcED-90-120,
                                                                       Spring 1990)


                  Page 17                                            GAO/RCED9&142   1990 Farm Bill
Section 2

Farm Finance


                       The Congress needs to reexamine the Farmers Home Administration’s
Reevaluating FInHA’s   (FI-IMA)role in providing agricultural credit because (1) M’S    financial
Role and Mission       condition continues to deteriorate, despite a general improvement in the
                       overall agricultural economy, and (2) it faces fundamental questions
                       about its ability to serve as a temporary source of credit while fulfilling
                       its role as a lender of last resort.


Background             F~HA provides what is intended to be temporary credit assistance to
                       family farmers whose financial situations prevent them from obtaining
                       credit elsewhere at affordable rates and terms. In this capacity, F~HA
                       must balance the competing objectives of following sound lending prac-
                       tices that protect the government’s and, ultimately, the taxpayers’
                       financial interests with providing assistance to financially troubled
                       farmers.


Analysis               The financial condition of M’S      farm loan portfolio has deteriorated.
                       About one-half of its $23 billion in outstanding direct farm loan princi-
                       pal is owed by delinquent borrowers and vulnerable to future losses. In
                       fiscal year 1988, FNIHAreported $30.5 billion in unpaid principal and
                       interest on its direct farm loan portfolio (with $19 billion established for
                       loss allowances), and $3.6 billion in guaranteed unpaid principal on
                       guaranteed farm loans (with $1.2 billion established for loss
                       allowances.) Since its inception, the revolving fund from which all
                       farmer program loans are made shows a cumulative deficit of nearly
                       $29 billion.

                       Deterioration has occurred, in part, because F+IRHA’S loan-making policies
                       have provided farm loans to borrowers who are unable to repay them.
                       These farmers then require F~HA to take extensive loan-servicing
                       actions. In short, FMIA is on a loan-making and -servicing treadmill. The
                       Congress, in enacting the Agricultural Credit Act of 1987, directed FWU
                       to consider reducing delinquent borrowers’ debt if, because of inade-
                       quate collateral, it was less costly for the government than foreclosing
                       on loans. FITIHAhas estimated that it will write down or write off about
                       $9.4 billion of its farmer program debt to implement the act’s debt-
                       restructuring provisions. The Congress allows the agency to revise cer-
                       tain FWM loan-making criteria if it adequately studies the effect of such
                       a revision on its borrowers and provides the Congress with sufficient
                       time to review the results.




                       Page 18                                          GAO/RCED9@142   l!EtO Fame Bill
                    Section   2
                    Farm Finance




                    In addition, F~HA has become a continuous rather than a temporary
                    source of subsidized credit for many borrowers-many       of whom have
                    loans that will never be repaid. For example, as of September 30,1989,
                    about 35 percent of all F~HA farm program borrowers had had at least
                    one F~HA loan continuously for 10 years or more. The benefits F~HA bor-
                    rowers receive are substantial. GAO estimated that during 1986 the gov-
                    ernment subsidized the interest rate for F~HA farm program borrowers
                    at a cost of between $612 million and $1.6 billion. Further, the financial
                    advantage F~HA borrowers gained over other farmers who borrow
                    money from non-Fm&%lenders amounted to between $1.2 billion and
                    $2.2 billion in 1986.

                    Finally, F’IWA’Sshift from direct to guaranteed farm loans will not solve
                    its financial problems. Most guaranteed loans are being made to existing
                    commercial customers. Few direct farm loan borrowers have shifted to
                    guaranteed farm loans, and most probably will not because of their poor
                    financial condition. As a result, continued substantial budget outlays are
                    likely to be needed to finance direct loans. In addition, the increase in
                    outstanding principal for guaranteed loans has outpaced the decrease in
                    outstanding principal for direct loans, by about $570 million between
                    fiscal years 1986 and 1988. Consequently, the government’s overall
                    financial exposure has increased.


Suggestions for     Only the Congress can make the necessary basic policy decisions on how
Congressional       F~HA should balance its role as both an assistance and loan-making
                    agency. These decisions should consider how N’S        programs affect the
Consideration       budget; how much credit assistance can help farmers who are facing
                    extreme financial stress; how long such credit should continue; how con-
                    tinued credit affects farmers’ financial viability; and what these deci-
                    sions mean for rural communities.

                    The Congress has indicated that it wants to continue to assist financially
                    stressed farmers and keep them in business if at all possible. However,
                    current conditions raise fundamental questions about how F~HA can ful-
                    fill its mandate to serve as a temporary source of credit while fulfilling
                    its role as a lender of last resort. Unless FNIHA’Srole and mission are
                    reevaluated, its farm loan portfolio will continue to deteriorate and
                    losses will mount. The Congress can reevaluate F~HA’Srole by focusing
                    on several key issues:

                  . Are the continuation and debt restructuring policies the best means of
                    assisting already heavily indebted farmers?


                    Page 19                                         GAO/‘ItCTEBW142   1990 Farm Bill
    Section 2
    Farm Finance




l At what point will the cost of providing continuous credit assistance to
  financially marginal farmers- including the cost of loan losses, interest
  rate subsidies, and administrative expenses-outweigh      the benefits to
  the government, rural communities, and the farmer?
. If F~HA is to serve as a temporary source of credit, should specific crite-
  ria be developed-such as time limits and/or measurable financial
  improvement-to      decide when a borrower has had a sufficient opportu-
  nity to become financially sound and to graduate to non-FmHAsources of
  credit?
. For those borrowers who, after a period of time, show little or no pros-
  pect for succeeding, would it be more appropriate to provide other
  forms of assistance, such as job training, to aid in making a transition to
  other employment opportunities?

    For more information, see Issues Surrounding the Role and Mission of
    the Farmers Home Administration’s Farm Loan Programs (GAO/T-
    ~~~~-90-22, Jan.25,1990 and GAO/T-~~~~90-27, Feb.8,1990).




    Page 20                                        GAO/RCED9@142   1990 Farm Bill
Section 3

Crop Disaster Assistance Program


                     A strengthened crop insurance program, without competition from loan
Providing Disaster   and direct payment programs, can provide disaster assistance more
Assistance Better    effectively than alternative approaches,
Through Crop
Insurance

Background           Throughout the 198Os, USDAprovided disaster assistance to farmers
                     through direct cash payments, subsidized loans, and subsidized insur-
                     ance. Each of these programs helps farmers deal with a loss of income if
                     their crops are damaged or destroyed by natural causes. Between fiscal
                     years 1980 and 1988, these programs cost the government about
                     $17.6 billion: $6.9 billion for direct cash payments, $6.4 billion for disas-
                     ter emergency loans, and $4.3 billion for crop insurance.’


Analysis             Before 1980, USDAprovided disaster assistance mainly through direct
                     payments and loans. The Congress expanded the crop insurance pro-
                     gram in 1980, believing that an expanded program covering more crops
                     and a larger part of the nation would alleviate the need for expensive,
                     ad-hoc disaster assistance programs. This has not proven to be the case,
                     however. The Congress has continued to provide disaster assistance to
                     farmers through direct payment and emergency loan programs, in part
                     because crop insurance participation rates have remained relatively
                     low. Since 1980, the amount of eligible acres enrolled in the program has
                     risen from 9.6 percent in 1980 to 24.5 percent in 1988, well below the
                     50percent target established for the program in 1980. Participation
                     rates rose to about 40 percent in 1989 in response to the severity of the
                     1988 drought and requirements for some disaster assistance recipients
                     to purchase crop insurance.

                     Crop insurance is a more equitable and efficient way to provide disaster
                     assistance compared with the ad hoc disaster assistance and emergency
                     loan programs of the 1980s. This conclusion is based on two principles:
                     disaster victims should be treated equitably and consistently over time,
                     and overall program and society costs should be minimized. An equita-
                     ble disaster assistance policy ensures that aid is provided consistently to
                     victims suffering from similar losses over time, and an efficient disaster
                     assistance policy ensures that overall program and societal costs are
                     minimized.

                     ‘Includes disaster payments paid in 1989.



                     Page 21                                           GAO/‘ltCEDBO-142   1980 i’arm Bill
                  Section 3
                  Crop Measter   As&same   Program




                  The crop insurance program addresses these principles, for example, by
                  ensuring that (1) the amount of disaster assistance provided is deter-
                  mined by the farmer’s loss, and not by the severity of the disaster; (2) it
                  is consistently available over time to allow for long-range planning; and
                  (3) it helps farmers withstand and recover from the effects of natural
                  disasters in the way it provides assistance.

                  Despite these characteristics, the crop insurance program faces two crit-
                  ical problems. First, it has had a history of management problems that,
                  in the short term, makes it difficult to justify it as the sole source of
                  disaster assistance to farmers. Consequently, if the Congress chooses to
                  rely on the crop insurance program exclusively to provide crop disaster
                  assistance, a transition period for strengthening the program probably
                  will be necessary.

                  Second, the program had to compete throughout the 1980s with direct
                  assistance and loan programs that received larger amounts of federal
                  funds and offered farmers more attractive terms. Consequently, the
                  crop insurance program’s participation rates have remained low, and it
                  has never been actuarially sound. Restructuring the agriculture disaster
                  assistance programs to remove this disadvantage will help determine
                  how effective the crop insurance program can be.


Suggestions for   The Administration, in its 1990 farm bill proposals, recommends replac-
Congressional     ing the crop insurance program with a legislated disaster assistance pro-
                  gram similar to the 1988 and 1989 disaster payment programs. The new
Consideration     program would provide direct payments for individual losses on a crop-
                  by-crop basis whenever countywide harvested yields fell below 65 per-
                  cent of normal yields.

                  GAO has not studied the Administration’s proposal in detail. However,
                  because the Administration’s proposal is similar to previous disaster
                  payment programs, GAO believes that it would not provide disaster assis-
                  tance as equitably and efficiently as a well-designed and well-managed
                  crop insurance program.

                  For more information, see Disaster Assistance: Crop Insurance Can Pro-
                  vide Assistance More Effectively Than Other Programs (GAO/RCED89-211,
                  Sept. 20, 1989) and Roles, Cost, and Criteria for Assessing Agriculture
                  Disaster Assistance Programs Between 1980 and 1988 (GAO/T-RCED-90-37,
                  Mar. 6, 1990).



                  Page 22                                         GAO/RCED-9@142   1990 Farm Bill
Section G

Conservation and Environment


                          Although the Conservation Reserve Program has achieved substantial
Making the                reductions in soil erosion, it has not effectively addressed all of its
COnSeIWtiOn Reserve       objectives.
Program More
Effective

Background                In 1985, the Congress authorized the Conservation Reserve Program-a
                          multibillion-dollar program to remove 40 million to 45 million acres of
                          highly erodible cropland from production by 1990-to (1) reduce soil
                          erosion, which causes long-term losses in land productivity, sedimenta-
                          tion of water bodies, and damage to surface water and groundwater;
                          (2) curb the production of surplus commodities; and (3) provide farmers
                          with income support. The program’s legislation established specific acre-
                          age enrollment goals for each year from 1986 to 1990-up to a total of
                          45 million acres. The legislation also established a goal of planting trees
                          on at least 12.5 percent of program acres. The program was open to all
                          producers with highly erodible land. Beginning in 1986, USDA,under a
                          competitive bid system, held periodic sign-ups during which farmers
                          offered their highly erodible crop land for program enrollment in return
                          for an acceptable annual per-acre rental rate.


Analysis                  Farmers have enrolled about 34 million acres of land in the Conserva-
                          tion Reserve Program-now       one of the largest federally sponsored tree-
                          planting programs ever. The program will reduce soil erosion by hun-
                          dreds of millions of tons a year, decreasing sedimentation in reservoirs
                          and streams, increasing protection of recreational resources, and pre-
                          serving long-term productivity of the land. Furthermore, the amount of
                          damaging chemicals washed into streams and lakes will decrease, and
                          fish and wildlife habitat will be improved because of more trees and
                          grasses and reduced chemical use. Finally, the program will reduce the
                          production of surplus commodities and federal price and income support
                          payments, and provide additional income support to farmers.

                          Although the Conservation Reserve Program’s benefits are substantial,
                          USDA could have made the program more effective if it had taken the
                          following actions:

                      l   Managed the program to address the full range of its objectives. Instead,
                          USDA focused on the need to enroll prescribed acreage amounts. For
                          example, USDA relaxed the soil erosion eligibility criteria for enrolling


                          Page 23                                          GAO/‘RCED-9lI142   1990 Farm Bill
                      Section 4
                      Conservation   and Environment




                    land to increase the number of trees planted. Although USDA’Sdecision to
                    seek more tree acreage has merit because of the program’s tree-planting
                    goal, the overall effectiveness of the program suffered. The relaxed cri-
                    teria allowed more acreage that was not highly erodible into the pro-
                    gram. As a result, the soil savings on tree acres decreased, and other
                    benefits, like reduced sedimentation and improved water quality, were
                    not attained.
                  l Targeted cropland eroding at the highest rates. Although USDAofficials
                    have stated that reducing soil erosion was the Conservation Reserve
                    Program’s primary objective, program managers chose not to focus on
                    the land experiencing the worst soil losses. As a result, only about 30
                    percent of the most highly erodible land is now enrolled in the program.
                  . Targeted cropland that contributed most to surface water and ground-
                    water contamination. Although USDAhas taken some steps to address
                    these problems, more could have been done. For the most part, USDA
                    accepted improved water quality as a residual benefit of getting acreage
                    enrolled in the program.

                      In addition, the Conservation Reserve Program’s effectiveness was lim-
                      ited by a legislative provision capping enrollments at 25 percent of a
                      county’s cropland. The cap was designed to cushion local farm econo-
                      mies from the economic effects of large amounts of acreage being taken
                      out of production. However, this acreage cap excludes about 30 percent
                      of all highly erodible cropland from program participation and makes
                      the more limited pool of eligible acreage more expensive to enroll.
                      Although eliminating the cap may not be feasible, modifying the acreage
                      cap under certain criteria-by    enrolling cropland that contributes most
                      to surface or groundwater contamination, for example-would         be an
                      effective compromise.


Suggestions for       To improve the Conservation Reserve Program’s effectiveness, the Con-
Congressional         gress should consider (1) requiring USDA to include such factors as the
                      land’s contributions to reducing soil erosion and other program objec-
Consideration         tives in its competitive bid system for enrolling land in the program,
                      (2) allowing flexible annual and overall acreage goals that would better
                      enable USDA to focus on the full range of program objectives rather than
                      primarily on meeting the acreage goals, and (3) modifying the 25-per-
                      cent cap on acreage that can be enrolled in a county so USDA can have
                      more flexibility in targeting the most highly erodible acres or those that
                      contribute to water quality problems.




                      Page 24                                         GAO/%CED90-142   1990 Farm Bill
                  Sfxtion 4
                  Conservation   and Environment




                  For more information see, Farm Programs: Conservation Reserve Pro-
                  gram Could Be Less Costly and More Effective (GAOjRCED@O-13, Nov. 15,
                  1989).


                  Gradually extending the conservation compliance provisions to addi-
Expanding         tional cropland would achieve significant environmental benefits.
Conservation
Compliance for
Environmental
Benefits

Background        The conservation compliance program covers about 140 million highly
                  erodible acres, or about one-third of the 423 million acres of U.S.
                  croplands. Land eroding at 40 tons per acre per year is generally classi-
                  fied as highly erodible. To continue receiving farm program benefits on
                  highly erodible lands not enrolled in the program, producers must
                  develop conservation plans. As of January 1990, over 1.3 million conser-
                  vation plans have been prepared, and about 27 percent of these have
                  been implemented. The remainder must be implemented by 1995.


Analysis          Millions of acres do not meet the current definition of highly erodible.
                  Nevertheless, they may still be experiencing moderate to severe erosion
                  each year. Given USDA funding and staffing constraints, attacking ero-
                  sion on the most highly erodible land was a good first step. It may be
                  time, however, to consider addressing the problem of land eroding at a
                  lower, but still high, rate. Gradually requiring conservation planning for
                  all eroding cropland can yield considerable environmental benefits.


Suggestions for   The Congress should gradually expand conservation planning to include
Congressional     additional croplands that are eroding at moderate to high levels.
Consideration     For more information, see General Accounting Office’s View on the Con-
                  servation Provisions of the I990 Farm Bill (GAO/T-RCED90-49, Mar. 15,
                  1990).




                  Page 26                                         GAO/RCEDW142   1990 Farm BiB
Section 5

International Programs


               U.S. international agricultural programs encompass both the develop
               ment and cultivation of overseas markets for U.S. food and agricultural
               services and products, and the provision of food assistance throughout
               the world.

               In the 1985 farm bill, a primary objective was to increase the competi-
               tiveness of U.S. agricultural commodities overseas. Two new programs
               were enacted-the Export Enhancement Program and the Targeted
               Export Assistance Program. In addition, the act established a minimum
               annual program level for short-term export credit guarantees and a
               maximum annual program level for intermediate-term credit guarantees.

               Although the Administration points to the large increases in U.S. agri-
               cultural exports as evidence that these programs are successful, there
               are macroeconomic factors that have figured significantly in the
               increased competitiveness of US. agricultural commodities. These
               include the decline in the value of the U.S. dollar, the decreased loan
               rates mandated in the 1985 farm bill, and the generally tighter supply
               conditions that now prevail.

               Overseas food assistance is provided through the Public Law 480 pro-
               gram, which was established in 1954. The program’s multiple objectives
               not only include providing humanitarian assistance to combat hunger
               and malnutrition, but also developing and expanding export markets for
               agricultural commodities, encouraging economic development in devel-
               oping countries, and promoting U.S. foreign policy objectives.

               While the Congress debates the 1990 farm bill, the current round of mul-
               tilateral trade negotiations-known     as the Uruguay Round-is in its
               last year. The United States has made liberalizing agricultural trade its
               top priority in the Uruguay Round. If a multilateral agreement that lib-
               eralizes agricultural trade is reached, the Congress will have to consider
               making major legislative changes to U.S. export programs. Notwith-
               standing an agreement to liberalize trade, these programs could be
               administered more efficiently and effectively.

               GAO identifies opportunities for improving program performance in the
               analyses that follow.




               Page 26                                         GAO/‘RcEDsQ142   1990 Farm Bill
                       section 6
                       Intemational   Frograms




                       To strengthen the U.S. position in world agricultural trade, USDA needs to
Enhancing USDA’s       improve its commitment to marketing by developing strategic plans and
Commitment to          by changing its organizational structure to better carry out its marketing
                       responsibilities.
Marketing

Background             World agriculture trade has changed significantly-becoming       more mar-
                       ket-oriented and involving many nations in the buying and selling of
                       agricultural commodities and products. In this new context, the United
                       States may not be well-positioned to compete effectively. The United
                       States has traditionally relied on low prices to compete, but this
                       approach is only part of an integrated marketing approach to trade.
                       Such an approach coordinates market research, production, and distri-
                       bution to provide products that meet consumer demand. Our major com-
                       petitors use this approach to a greater extent.


Analysis               USDAis pursuing market-oriented trade objectives through multilateral
                       trade negotiations, trade legislation, and budget reallocations. However,
                       it has not developed a strategic plan to provide the long-term commit-
                       ment and organizational structure needed to compete in a market-ori-
                       ented, global economy. Instead, USDA continues to develop short-sighted
                       trade policies that are driven by its farm policy.

                       Because it has not planned strategically, USDAis poorly equipped to deal
                       with increased competition in world trade. For example:

                   . Only two of the four USDAagencies with marketing responsibilities that
                     GAO examined-the     Extension Service and the Agricultural Research
                     Service-have developed specific goals to meet their international trade
                     objectives. Such approaches allowed these agencies to allocate limited
                     resources more efficiently. The Foreign Agricultural Service and Agri-
                     cultural Marketing Service, however, have not done so. As a result,
                     these two agencies allocate resources inefficiently and do not respond
                     effectively to changing world markets.
                   l USDA’S preference for marketing bulk commodities and production tech-
                     nology, reflecting U.S. agriculture’s tendency to produce more than can
                     be consumed domestically, does not respond to growth opportunities in
                     value-added products.’ USDA’S inability to adapt to these opportunities in
                     world trade has resulted in a low U.S. share in this multibillion dollar

                       ‘Value added generally refers to the processing of commodities for consumption, or to make food
                       items more attractive to consumers. Cheese, for example, is a value-added milk product.



                       Page 27                                                         GAO/XCED9@142 1990 Farm Bill
                        Section 5
                        lntemational   Frograms




                         market. Better marketing of value-added products would also have a
                         multiplier effect on rural development. The Economic Research Service
                         estimated that the United States would have generated an additional $9
                         billion in value-added exports and 350,000 marketing and processing
                        jobs if the country had maintained the same rate of growth in value-
                         added exports as in bulk commodity exports.

                        usm’s independent agency structure, which lacks strong central man-
                        agement, contributes to the Department’s inability to achieve a market-
                        ing orientation. The Foreign Agricultural Service, for example, does not
                        regularly coordinate with the Economic Research Service, Agricultural
                        Research Service, and Extension Service. In addition, the Agricultural
                        Research Service and the Extension Service, which have initiated proac-
                        tive interagency planning, have been frustrated by usm’s traditionally
                        reactive coordination, in which agencies use single contact points to
                        coordinate policies among agencies.


Suggestions for         The Congress should require usm to develop a Department-wide strate
Congressional           gic plan for trading in global markets to improve its marketing perform-
                        ante. Strategic planning would establish a firm organizational
Consideration           commitment, develop commonly accepted goals and programs, and reor-
                        ganize agency resources. Such a planning effort would enhance USDA'S
                        ability to respond to changing world markets and strengthen the United
                        States’ position in world agricultural trade, especially in the growing
                        area of value-added products.

                        For more information, see U.S. Department of Agriculture: Interim
                        Report on Ways to Enhance Management (GAo/RcEDSO-19,     Oct. 26,1989),
                        and International Trade: Foreign Market Development for High Value
                        Agricultural Products (GAO/NSIAD-90-47, Jan. 17, 1990).


                        USDA should continue to use the Export Enhancement Program selec-
Continuing to Use the   tively as leverage in negotiating a more liberal agricultural trade agree-
Export Enhancement      ment. The Congress should reassess the need for the program when a
Program More            trade agreement is negotiated.
Selectively

Background              The Export Enhancement Program provides U.S. exporters with govern-
                        ment-owned surplus agricultural commodities as bonuses, which enables


                        Page 28                                         GAO/‘RCED8@l42   1990 Farm Bill
           Section    6
           Internanonal   Programa




           them to lower commodity prices and compete with subsidized foreign
           agricultural exporters, especially those of the European Community.
           The Secretary of Agriculture established the program in May 1985, in
           reaction to continuing decreases in U.S. agricultural exports. Later that
           year, the Congress authorized the program in the farm bill. As of Febru-
           ary, 1990, the Foreign Agricultural Service, which manages the pro-
           gram, had announced 105 initiatives, involving 65 countries and
           12 commodities, and resulting in over $9 billion in sales. USDAhad made
           approximately $2.7-billion worth of surplus agricultural commodities
           available to exporters.


Analysis   USDAtargets Export Enhancement Program sales to markets where agri-
           cultural exports can be increased. Initially, USDAtargeted program sales
           to countries purchasing significant quantities of European Community-
           subsidized commodities. As the program expanded, USDA began targeting
           countries where the European Community countries had a limited pres-
           ence. In the past year, however, USDAhas again begun using the program
           more selectively to further trade policy objectives.

           The Export Enhancement Program’s effectiveness is problematic. U.S.
           agricultural exports have increased significantly since the program’s
           inception, but it is difficult to determine how much of this increase is
           due to the program. Its effect cannot be easily isolated from other policy
           and economic variables influencing exports, such as lower loan rates,
           export financing and other government assistance, the U.S. dollar’s
           depreciation against major competitors’ currencies, and production
           shortfalls. For example, recent studies agree that the Export Enhance-
           ment Program has increased U.S. wheat exports, but they disagree on
           how much of the increase was due to the program, with estimates rang-
           ing from 2 to 30 percent. The studies’ conclusions are significantly influ-
           enced by the assumptions made and time period covered.

           The Export Enhancement Program is now operating in an environment
           that contrasts sharply with 1985, when U.S. agricultural exports were
           decreasing and government-owned grain surpluses were rising. For
           example, in the past year, the world supply of wheat has become rela-
           tively tight because of adverse weather conditions and decisions by
           some producing countries to reduce production. World prices have risen
           as a result.

           Despite the difficulty of measuring the Export Enhancement Program’s
           effectiveness, the U.S. government views it as a valuable trade policy


           Page 29                                          GAO,ltCJ3D9o-142   1990 Farm Bill
                      Section 6
                      International   Programs




                      tool that has encouraged the European Community to negotiate more
                      liberal agricultural policies in the Uruguay Round of the multilateral
                      trade talks. Moreover, the program has probably increased the resolve
                      of other trade competitors, such as Australia, Canada, and Argentina, to
                      press for an agricultural trade agreement. The U.S. government has
                      therefore continually reaffirmed its position that any unilateral conces-
                      sion would weaken the U.S. negotiating position.

                      In recognition of the Export Enhancement Program’s usefulness to the
                      U.S. negotiating position, USDA should continue to use the program selec-
                      tively to increase the export of specific agricultural commodities in spe-
                      cific markets.


Suggestions for       The Congress should reassess the need for the Export Enhancement Pro-
Congressional         gram at the conclusion of the current negotiating round-scheduled for
                      December 1990-in light of any agreement reached on agricultural
Consideration         trade liberalization.

                      For more information, see International Trade: Activity Under the
                      Export Enhancement Program (GAo/NsIAD9o-ssFs,Feb. 12, 1990); Inter-
                      national Trade: Export Enhancement Program Bonus Overpayments
                      (GAO/NSIADW-~~,   Feb. 7, 1990); Status Report on GAO'S Reviews of the
                      Targeted Export Assistance Program, the Export Enhancement Pro-
                      gram, and the GSM-1021103 Export Credit Guarantee Programs (GAO/T-
                      NSIAD-90-02, Feb. 21, 1990); and International Trade: Implementation of
                      the Agricultural Exoort Enhancement Pro&am   -v-  \
                                                                        ~GAO/NSIAD-S~-~~BR, Mar.
                      17, 1987).            *


                      Combining the Targeted Export Assistance Program and Cooperator
Combining the         Market Development Programs (Cooperator Program) would make
Targeted Export       USDA'S market development programs more effective and improve pro-

Assistance and        gram administration,
Cooperator Programs

Background            USDA  uses both the Targeted Export Assistance and Cooperator Pro-
                      grams for its market development activities. The Congress established
                      the Targeted Export Assistance Program in 1985 to increase U.S. agri-
                      cultural exports by countering or offsetting the adverse effects of for-
                      eign competitors’ unfair trade practices, such as subsidies and import


                      Page 30                                          GAO/WED-9S142   1990 Farm Bill
           !ikction   6
           lnt.emational   Frograms




           quotas. In administering the program, the Foreign Agricultural Service
           chose to focus on the promotion of high-value products and horticultural
           crops that, according to some commodity groups, were not benefiting
           from USDAexport programs. It was funded at $200 million for fiscal
           years 1989 and 1990, and $110 million annuahy for fiscal years 1986
           through 1988. In contrast, the Cooperator Program, in effect for 35
           years, focuses primarily on developing and maintaining overseas mar-
           kets for U.S. bulk commodities. The program, also administered by the
           Foreign Agricultural Service, is funded annually at approximately
           $35 million. The private sector also provides funding for these market
           development programs.


Analysis   Combining the Targeted Export Assistance Program with the Coopera-
           tor Program would make USDA'S market development activities more
           effective. Both programs fund the same types of activities, such as con-
           sumer promotion, trade servicing, and technical assistance. A combined
           program could continue to tailor the activity to the commodity or prod-
           uct being promoted. Because approximately half of the Targeted Export
           Assistance Program participants are also in the Cooperator Program,
           coordination of activities would prevent duplication of effort and would
           provide more complete and accurate information to management con-
           cerning the scope of market development activities worldwide.

           Combining the two programs would also probably be a more efficient
           use of the Foreign Agricultural Service’s resources. Marketing special-
           ists and other Service officials presently manage the two programs sepa-
           rately because they operate under different deadlines and use different
           programming criteria. A combined program would facilitate decision-
           making for program specialists because they would then have one set of
           criteria for funding allocations, participant contributions, program eval-
           uations, and other aspects of program administration.

           In addition to combining the programs, the Foreign Agricultural Service
           can also improve USDA’Smarket development efforts by ensuring pro-
           gram accountability through better documentation and evaluation. The
           Service cannot, for example, clearly show how funding criteria are
           applied and set in priority order for major program decisions. Because
           GAO and USDA'S Office of Inspector General have expressed concern
           about these problems, the Service has submitted proposed regulations
           for the Targeted Export Assistance Program to the Office of Manage-
           ment and Budget for review.



           Page 31                                        GAO/‘RCED9&142   1990 Farm Bill
                     Section   6
                     lnt.emanonal   Programs




                     The Foreign Agricultural Service has also not fully utilized evaluations
                     for oversight and management. It needs to consistently track and
                     enforce compliance with evaluation requirements and use the results of
                     participant evaluations in making subsequent funding allocations. It also
                     needs to more thoroughly evaluate the overall effectiveness of these
                     market development programs.


Suggestions for      The Congress should consider requiring USIA to combine the Targeted
Congressional        Export Assistance Program and the Cooperator Program to make them
                     more efficient. In addition to the Foreign Agricultural Service’s making
Consideration        greater use of evaluations for oversight and management, combining the
                     programs would help ensure that market development funds are used
                     more effectively.

                     For more information, see Status Report on GAO'S Reviews of the
                     Targeted Export Assistance Program, the Export Enhancement Pro-
                     gram, and the GSM-102/103 Export Credit Guarantee Programs (GAO/T-
                     NSIAB90-02, Feb. 21,199O); Agricultural Trade: Review of the Targeted
                     Export Assistance Program (GAO/NSW-W-183, May 24,1988); and Inter-
                     national Trade: Review of Effectiveness of FAS Market Development
                     Program (GAO/NSLAD-S7-t39, Mar. 17,1987).


                     Export credit guarantee programs need better controls to ensure pro-
Controlling Export   gram integrity and minimize the government’s financial risk.
Credit Guarantee
Programs Better

Background           Through the Commodity Credit Corporation (ccc), USDA manages export
                     credit guarantee programs designed to encourage U.S. agricultural com-
                     modity and product exports. Under these programs, about $5.5 billion in
                     loan guarantees are made available annually to exporters or their
                     assigned financial institutions. These guarantees ensure that the export-
                     ers, or their consignees, will be repaid for credit sales made to foreign
                     buyers. Like other guarantee programs, the government incurs no direct
                     costs-except for program administration-unless         defaults occur and
                     claims for repayments are made. Although GAO was unable to quantify
                     the amount of additional exports resulting from these programs, the ccc
                     credit guarantees appear to enhance agricultural exports because they
                     enable those with limited financial resources to buy commodities.



                     Page32                                         GAO/‘RCJD~142   19BO Farm BilJ
           Section 6
           International   Programs




Analysis   CCCdoes not adequately control the participation of financial institu-
           tions nor ensure that only U.S. agricultural commodities are exported
           and that they reach their destination. Instead, ccc officials have tradi-
           tionally taken a hands-off management approach; they view the pro-
           grams as primarily private sector transactions, subject to the normal
           private sector business controls. As a result, CCCdoes not (1) review
           financial institutions’ internal controls to ensure that appropriate bank-
           ing standards are met; (2) ensure that financial institutions spread their
           loan portfolio among many countries, to avoid concentrating loans in
           one country, which can expose the U.S. government to undue risk; or
           (3) physically verify that exporters use guaranteed loans only for U.S.
           agricultural commodities and that commodities reach their intended
           destinations.

           Without adequate controls, guaranteed credit funds can be misused. In
           one case, now under a Department of Justice criminal investigation,
           employees of a U.S. bank made billions of dollars of loans to a foreign
           country-a     significant portion of which derived from the ccc credit
           guarantee programs-without        the authorization of high-level bank offi-
           cials. The amount of loans greatly exceeded the bank’s approved risk
           exposure for that country. In addition, it has been alleged that the coun-
           try is not using the loans for their intended purposes. Because of its
           inadequate controls, ccc does not know if the loans were used for U.S.
           agricultural commodities, and if they were, whether the commodities
           were actually delivered to the country.

           Finally, CCC does not recognize in its financial statements the amount of
           estimated losses in its loan guarantee programs. Losses since the pro-
           grams began, as of September 30, 1988, are estimated to range from
           $2.3 billion to $3.5 billion on guarantees of outstanding loans to foreign
           countries of $6 billion. A policy of recognizing estimated losses in finan-
           cial statements has been adopted by the Export-Import Bank, which
           manages similar programs.

           Establishing better controls over guaranteed credit funds would mini-
           mize the government’s loan-guarantee risk by ensuring that only
           approved commodities are guaranteed and delivered. Tightening up the
           $5.5-billion export guarantee programs can prevent defaults and save
           the government millions of dollars in future costs.




           Page 33                                          GA0/‘RCED9o-142   1930 Farm Bill
                      Section 6
                      Intemational   Programa




Suggestions for       The Congress should consider requiring CCCto adopt a policy of recog-
Congressional         nizing in its financial statements the amount of estimated losses in its
                      loan guarantee programs. Recognizing estimated losses in CCC’Sfinancial
Consideration         statements will more accurately reflect ccc’s financial condition.

                      For more information, see International Trade: Commodity Credit Cor-
                      poration’s Export Credit Guarantee Programs, (GAO/NSIAD-SS-194, June 10,
                      1988), Commodity Credit Corporation’s Export Credit Guarantee Pro-
                      grams (GAO/T-NSIAD-S9-2, Oct. 6, 1988; GAO/T-NSLm-89-9, Mar. 2, 1989; and
                      GAO/T-NSIm-89-41, June 14,1989); Status Report on GAO'S Reviews of the
                      Targeted Export Assistance Program, the Export Enhancement Pro-
                      gram, and the GSM-102/103 Export Credit Guarantee Programs, (GAOP-
                      NslAb-so-n?,Nov. 16, 1989); and Financial Audit: Commodity Credit Cor-
                      poration’s Financial Statements for 1988 and 1987 (GAO/AFMD-89-83, Aug.
                      4, 1989).


                      The Agency for International Development (AID) needs to clarify how
Clarifying            much accountability its overseas missions should exercise over local cur-
Accountability Over   rencies generated from food sold under Public Law 480 (P.L. 480).
P.L. 480 Local
Currencies

Background            Under title I of P.L. 480, developing countries may receive long-term,
                      low-interest credits to purchase U.S. agricultural commodities that they
                      sell in-country. The host country must agree with AID on the use of these
                      sales proceeds, which traditionally have been viewed as owned by the
                      host country. AID is to ensure that host countries use the local currencies
                      for economic development.’ Developing countries spent the equivalent of
                      $562 million in P.L. 480-generated currencies in fiscal year 1988.


Analysis              AID and its Office of Inspector General differ on the agency’s role in
                      administering P.L. 480’s local currency provisions. AID argues that,
                      although it must be satisfied that local currency is used for appropriate
                      economic development, host countries are ultimately accountable for the
                      proper use of these funds because they own them. Consequently, AID has
                      its missions rely as much as possible on host governments to account for

                      “Under certain provisions, title II of P.L. 480 also generates local currencies, which must be used for
                      similar development purposes.



                      Page 34                                                             GAO/RCED9@142        1990 Farm Bill
Section    6
IntemationaI   Frograms




the use of the local currencies. AID maintains that increasing demands
for accountability create friction because host countries view the cur-
rencies as their own.

In contrast, the Inspector General contends that AID'S missions must
maintain accountability for these funds because they are generated as a
result of US. assistance. Using this criterion, the Inspector General
audits have found that many AID missions, because of accounting and
monitoring weaknesses in the mission or host government, cannot
always ensure that local currencies are being used for economic
development.

Because host countries vary in their development needs and manage-
ment capabilities, AID'S policies provide missions with substantial flexi-
bility in designing local currency programs. Consequently, AID'S
guidance for monitoring local currency is written to provide maximum
flexibility, and is therefore sometimes ambiguous. For example, AID mis-
sions are sometimes required to take a “more active” monitoring role
when they are not reasonably assured that host countries have ade-
quate implementation and monitoring capabilities.

According to AID officials, lack of universally accepted accountability
requirements has created frustration and uncertainty at overseas mis-
sions. These missions also say they do not have staff to significantly
increase their monitoring of local currency. They acknowledge, how-
ever, that they need to better account for local currency use in some
areas.

To effectively implement local currency programs, AID needs to establish
clear and practical accountability guidelines. These guidelines should be
sufficiently flexible to allow the missions to negotiate local currency
uses according to each country’s development needs and managerial
capabilities, and should take AID'S limited mission resources into consid-
eration. Most importantly, the guidelines should emphasize assessing
and improving the financial management systems of host country agen-
cies so that AID can be reasonably assured that the currencies will be
properly used.




Page 35                                         GAO,‘RCED-W142   1990 Farm BiJl
                  Section 5
                  I.nternational   Progrfuns




Suggestions for   Although GAO makes no suggestions for congressional consideration, the
Congressional     Congress should satisfy itself that AID administratively resolves this
                  accountability issue.
Consideration
                  For more information, see Status Report on GAO’S Reviews of P.L. 480
                  ~O@XInS(GAO/T-NSIAD-90-23,  Mar.21, 1990)




                  Page 36                                      GAO,‘RCED-90-142   1990 Farm Bill
Section 6

Food Stamp Program


                        The Congress should consider providing a full month’s worth of benefits
Providing Full Food     to participants who file recertification applications up to 1 month late.
Stamp Benefits After
Late Applications Are
Received

Background              The food stamp application process is complex, in part because of the
                        need to ensure that only eligible applicants participate in the program.
                        Applicants are primarily responsible for substantiating their eligibility.
                        They must provide at least 60 pieces of information about household
                        size, income, living expenses, and assets. Not surprisingly, eligible pro-
                        gram participants do not always comply with these procedures in a
                        timely manner and therefore can be temporarily terminated from the
                        Food Stamp Program. These eligible households could then be without
                        food assistance.


Analysis                For households temporarily terminated (from 1 day to 3 months) from
                        the Food Stamp Program for procedural noncompliance, GAO estimated
                        that 49 percent of the households in one state and 68 percent of the
                        households in another experienced breaks in benefits in fiscal year
                        1987. About 87 percent of the breaks represent proper changes that the
                        program is designed to adjust for. The remaining 13 percent, however,
                        were due to either households’ or state agencies’ not complying with
                        procedural requirements As a result, these otherwise eligible house-
                        holds lost benefits of between $800,000 and $5.3 million in the two
                        states. Other states GAO contacted indicated that they may face similar
                        conditions.

                        To continue in the program, a participant must submit either timely
                        monthly reports or new applications for recertification by specified
                        dates. Participants in both states, however, did not always complete and
                        submit monthly reports or new applications on time, or complete other
                        requirements, causing an estimated 29,100 temporary terminations from
                        the program and loss of benefits. The majority (88 percent) of these
                        breaks occurred because participants did not file timely or complete
                        applications for recertification.

                        When the food stamp office does not receive a new application before
                        the certification of eligibility expires, it terminates the participant and



                        Page 37                                           GAO/RCED-90142   1990 Farm Bill
                        !!kction   6
                        Food Stamp Program




                        provides a prorated benefit based on the date it receives the new appli-
                        cation. If this provision was changed to allow participants an extra
                        month to submit a new application, as is the case for monthly reporting,
                        most participants filing late would receive a full month’s worth of bene-
                        fits. To ensure those participants’ eligibility for the full month’s bene-
                        fits, however, the state would not issue the actual benefit until the
                        participant had submitted a new application for recertification and met
                        all other program requirements.


Suggestions for         If the Congress believes that the benefits to participants from such a
Congressional           change would outweigh the cost increases, it should exclude from the
                        proration provisions of the Food Stamp Act those participants who file
Consideration           new applications for recertification within a month of their expiration
                        date. Such an exclusion would be consistent with present provisions
                        governing monthly reporting.

                        This change would increase program costs. GAO estimated, for example,
                        that households in one state would have received between $18,400 and
                        $158,000 more during fiscal year 1987, while households in another
                        state would have received between $50,000 and $1.5 million more for
                        the same period.

                        For more information, see Food Stamp Program: Participants Temporar-
                        ily Terminated for Procedural Noncompliance (G~o/RCEr%89-81, June 22,
                        1989).


                        The 75percent funding level for food stamp automation should be dis-
Discontinuing the 75    continued because it has accomplished the objective established by the
Percent Funding Level   originating congressional committee.
for Food Stamp
Automation

Background              Food stamp automation helps state and local agencies reduce program
                        errors, manage large caseloads, and improve services to participants.
                        Since 1980, state agencies have spent about $524 million in federal and
                        state funds to automate. In addition to the normal 50percent rate of
                        federal funding for developing and operating automated systems, the
                        Food Stamp Act Amendments of 1980 increased the federal share to



                        Page 38                                         GAO/‘ECEIMKk142 1990 Farm Bill
                  Se&on6
                  FoodStampProgram




                  75 percent to encourage states not yet automating to begin automating
                  their food stamp programs.


Analysis          The House Committee on Agriculture intended that the 75percent fed-
                  eral cost-sharing would be a one-time incentive to encourage state agen-
                  cies not computerizing their programs to automate. USDA, however,
                  approved 75percent funding to 37 state agencies-sometimes more
                  than once-to upgrade, modify, or replace existing automated systems.
                  Only four of these state agencies received the 75percent funding to
                  automate for the first time. The other 33 state agencies received 75-per-
                  cent funding to upgrade, modify, or replace automated capabilities that
                  were similar to those the Department approved for other state agendes
                  at the 50percent rate.

                  These 33 state approvals represented a broader interpretation of the act
                  than the drafters of the 75percent provision expected. Once the initial
                  development of automated data processing with the 75percent funding
                  had been achieved, all future development was to be funded at 50
                  percent.

                  USDA  disagreed with GAO'S position that it has acted in a manner incon-
                  sistent with the originating Committee’s intention. Given the difference
                  in views, GAO brought this issue to the Congress’ attention for its consid-
                  eration and for any additional direction. The Congress has not yet given
                  such guidance, and USDA continues to state that it can approve 75-per-
                  cent funding to upgrade and modify automated systems.

                  More importantly, states no longer need enhanced federal funding to
                  begin automating their systems. All state agencies have begun auto-
                  mating their food stamp programs.


Suggestions for   Because all state agencies have automated their systems to some extent,
Congressional     thereby accomplishing the originating committee’s objective, GAO recom-
                  mends that the Congress discontinue the 75percent level of federal
Consideration     funding for food stamp automated systems.

                  For more information, see Food Stamp Program: Progress and Problems
                  in Using 75-Percent Funding Automation (GAO/RCEDSS-58, Apr. 28, 1988)
                  and Food Stamp Automation: Some Benefits Achieved; Federal Incentive
                  Funding No Longer Needed (GAO/RCEDWQ, Jan. 24,199O).



                  Page39                                           GAO/'B~~1421999Fa1mBill
                       Section 6
                       Food Stamp Program




                       Outreach to enroll people in the Food Stamp Program should be tailored
Targeting Food Stamp   to those groups that would most benefit from it.
Outreach Better

Background             On average, about 50 percent of eligible households receive food stamp
                       benefits, according to GAO'S review of nine studies. GAO’S own study of
                       food stamp participation showed an estimated food stamp participation
                       rate of 43.8 percent,’ which generally agrees with the other studies’
                       findings.


Analysis               Of the households that GAO determined were eligible for food stamps but
                       that did not participate, (1) 38 percent did not do so because they did
                       not want benefits (2) 37 percent because they lacked information about
                       the program, and (3) 25 percent because they had problems with the
                       program or with gaining access to it.

                       Reasons for not participating also varied according to household charac-
                       teristics. Households reporting a lack of desire for benefits were those in
                       which the head of the household was, for example, a white, married
                       individual, or a Social Security recipient. Households that reported a
                       lack of information about the program were those headed by white, sin-
                       gle males, or by single females. Households reporting problems with the
                       program or access to it were, for example, those receiving Supplemental
                       Security Income or receiving other welfare benefits, or headed by a sin-
                       gle male.

                       From a policy viewpoint, eligible households that choose not to partici-
                       pate may not be a problem if they do so fully knowing the benefits they
                       are declining. On the other hand, difficulty with the program, access to
                       it, and lack of information about it, are problems that can be remedied.
                       The Hunger Prevention Act of 1988 specifies many actions USDA can
                       take to reduce program or access problems, including outreach for low-
                       income households.

                       Nationally, different population groups are more likely to lack informa-
                       tion about the program than others. Although the exact mix of nonpar-
                       ticipants and reasons for nonparticipation will vary from locale to


                       ’ Based on questions included as part of the 1986 Panel Study of Income LIynamics, a nationally repro
                       tentative sample of households.



                       Page 40                                                           GAO/‘RCED9C142       1990 Farm Bill
                  Se&on     6
                  Food Stamp Program




                  locale, GAO found that households headed by single individuals are most
                  likely to be influenced by effective outreach.

                  The Food and Nutrition Service should encourage states to target out-
                  reach to those groups that would most benefit from it and tailor the type
                  of outreach to the needs and characteristics of these groups. Such an
                  effort should maximize the returns on investments in outreach at the
                  state and federal levels. The Service agreed with our recommendation.


Suggestions for   Although congressional action is not required to implement this recom-
Congressional     mendation, successful implementation could increase food stamp partici-
                  pation and program costs.
Consideration
                  For more information, see Food Stamps: Examination of Program Data
                  and Analysis of Nonparticipation (GAO/PEMD-tN-21, July 5, 1988); Food
                  Stamps: Reasons for Nonparticipation (G~o/PErm-89-~BR, Dec. 8, 1988);
                  and Food Stamp Program: A Demographic Analysis of Participation and
                  Nonparticipation (GAO/PEMDQO-~, Jan. 19, 1990).




                  Page 41                                        GAO/‘RCELHO-142   1990 Fm   Bill
Section 7

Management


                    The Secretary of Agriculture faces a formidable task in mobilizing over
                    110,000 full-time employees spread among 36 agencies to implement
                    policies and programs under rapidly changing conditions and outside
                    pressures. Faced with these organizational constraints, the Secretary
                    and USDAmanagers must struggle to adapt their systems to new policy
                    requirements. These adaptations, however, have often resulted in poorly
                    developed and implemented programs. These difficulties place USM at
                    risk of being unable to effectively fulfill its missions to deal with the
                    growing number of emerging missions concerning the environment, food
                    safety, and biotechnology.

                    To overcome these constraints, USDAmust more effectively manage its
                    human resources, information systems, and finances. The absence of
                    strong central direction and leadership perpetuates long-standing weak-
                    nesses in these basic management areas. Absent more attention to fun-
                    damental management, USDA’Scapacity to develop and implement food
                    and agriculture policies and programs will continue to be severely
                    weakened.

                    Several analyses follow that highlight a number of important manage-
                    ment issues facing USDA. Although many of these suggestions and recom-
                    mendations can be addressed by the Secretary of Agriculture, the
                    Congress should be aware of these issues-which affect USDA’Sability to
                    carry out congressionally mandated programs-as it develops new pro-
                    grams for the 1990 farm bill.


                    Until USDA improves the accuracy of its forecasts of commodity program
Improving the       benefits, the Congress should view these forecasts skeptically.
Accuracy of
Commodity Program
Budget Forecasts

Background          USDA budget estimates for commodity programs provide policymakers
                    with a forecast of commodity program costs before money is spent.
                    These estimates help the Congress monitor these programs, debate pro-
                    posed revisions, and manage the national budget deficit. Commodity
                    program expenditures must be estimated because, among other things,
                    they depend on the number of acres enrolled in the program and produc-
                    tion levels, which are difficult to predict because they are influenced by
                    uncontrollable factors such as weather and expected world market


                    Page 42                                         GAO,‘RCED9@142   1990 Farm Bill
               Section 7
               Management




               prices, as well as by the payment rates set by the Secretary of
               Agriculture.


Analysis       USDA'S budget estimates for commodity programs between 1972 and
               1986-which     have been included in the President’s budgets-have
               often substantially underestimated the cost of program benefits. During
               this period, absolute errors totaled $64.1 billion. Between 1981 and
               1986, USDA underestimated these costs by between 40 percent and 80
               percent in 5 of the 6 years.

               Consequently, the Commodity Credit Corporation (ccc)-which    dis-
               perses commodity payments- spent on average considerably more than
               USDA had predicted. Although aware of the estimates’ weaknesses, USDA
               has never systematically informed the Congress about them.

               Several types of errors have affected USDA'S forecasting accuracy. In
               some cases, USDA made assumptions about program implementation that
               differed from actual implementation. In addition, erroneous economic
               assumptions, such as forecasts of inflation or growth in the gross
               national product, could have also caused errors.

               USDA's management of its forecast preparation is also deficient for sev-
               eral reasons:

           l   USDA  has not systematically attempted to identify the source of its fore-
               casting errors. Identifying previous mistakes cannot guarantee accurate
               future forecasts. However, evaluation techniques are available that can
               improve USDA'S forecasting and identify its limitations.
           l   USDA has not maintained records of the data used for supply-and-
               demand forecasts, or documented why in some cases official forecasts
               were not always used in developing budget estimates.
           .   USDA has generally not documented its forecasting methods, depriving
               users of information they need to evaluate the forecasts’ quality.
           l   USDA lacks a structured quality control program to correct weaknesses in
               various forecasting components, although it has taken action to correct
               some weaknesses.

               To improve the accuracy of USDA’Sforecasts, GAO recommended that the
               Secretary of Agriculture designate a single organization to manage the
               forecasting program and establish a quality control program. Although
               USDA generally agreed with these recommendations, it will take time to
               improve its forecasts.


               Page 43                                        GAO,‘RCFD90142   1990 Farm Bill
                        Section 7
                        Management




Suggestions for         Until improvements are made, the Congress should view USDA'S forecasts
Congressional           of commodity program costs skeptically, especially because of USDA'S
                        recent record of often underestimating these costs by between 40 per-
Consideration           cent and 80 percent.

                        For more information, see USDA'S Commodity Program: The Accuracy of
                        Budget Forecasts (GAO/PEMD-E%B-8, Apr. 2 1, 1988).


                        A set of new budget terms and totals are needed to ensure proper con-
Accurately Tracking     gressional scrutiny of commodity certificate costs.
Costs of the
Commodity Certificate
Program

Background              In April 1986, the Commodity Credit Corporation (CCC)began issuing
                        commodity certificates, in lieu of cash payments, to eligible farmers who
                        chose to participate in certain price- and income-support farm programs.
                        Close to $25 billion in certificates were issued through December 3 1,
                        1989. These certificates are negotiable and can be exchanged for cash
                        from ccc, for ccc-owned commodities, or for commodities under nonre-
                        course loan agreements.


Analysis                The government has not included commodity certificates in its totals for
                        budget authority, outlays, or obligations because certificates are not cur-
                        rently treated as cash. The federal budget generally operates on a cash-
                        basis for receipts and outlays, and budget authority generally provides
                        authority to incur obligations that will result in cash outlays. Conse-
                        quently, by not treating certificates as cash in the budget, the govern-
                        ment has been able to issue billions of dollars in certificates without
                        reporting any budget authority, outlays, or obligations.

                        The commodity certificate program is but 1 of 27 programs (as of
                        August 1988) with authority to use noncash assets as a means of financ-
                        ing. This form of financing is especially attractive in the current budget
                        environment, when there is heightened concern over federal spending.
                        The Office of Management and Budget is currently studying the budget
                        treatment of all noncash asset transactions to develop a standard budget
                        treatment that can be applied to all of them.



                        Page44                                          GAO/RCED-901421990FwmBiU
                       Section 7
                       Management




Suggestions for        To enable it to systematically review commodity certificates, the Con-
Congressional          gress should require the Administration to include the issuance of certif-
                       icates in budget totals reviewed by the Congress. Developing a set of
Consideration          new budget terms and totals to include commodity certificates would be
                       the preferred way to present the budget. However, simply including cer-
                       tificates in the budget authority and outlay totals without changing the
                       way current budgets are reported would be an improvement over the
                       current budget treatment of commodity certificates, which records their
                       issuance in a supplementary table in the budget appendix.

                       For more information, see Budget Issues: USDA'S Commodity Certificates
                       Should Be Recognized in Budget Totals (GAO/AFNNW?T,      Aug. 16, 1988)
                       and Commodity Certificates: Backlog of 200,000 Unreconciled Certifi-
                       cates Affects Financial Reporting (GAO~RCED-89-14, Oct. 25, 1988).


                       Because resources are increasingly scarce, USDA will need to deliver its
Reducing the Cost of   field services more cost effectively in order to maintain the level and
USDA’s Farm Service    quality of its farm services.
Delivery System

Background             In fiscal year 1988, USDA spent. over $2.1 billion and used over 63,000
                       staff years to administer the programs in its five farm service agencies.
                       This highly decentralized field system has endured since the 1930s
                       when the Department first established numerous small offices to service
                       the large number of small, widely dispersed, family-owned farms.


Analysis               Unlike many public and private organizations that periodically reorgan-
                       ize in response to external changes, USDA has made few adjustments to
                       its field structure since it was established. Largely out of concern that
                       the quality of service to constituents might suffer, proponents of the
                       existing field delivery system have successfully resisted change. Taking
                       action that may affect local offices is a highly sensitive issue that gener-
                       ates concern not only in the local area, but in the Congress as well-
                       much like closing a post office. Given this opposition, USDA has been
                       reluctant to embark on a course of change. This resistance continues in
                       the face of several trends-emerging      information technologies, the
                       declining farm population! budgetary pressures, and programs requiring
                       increased interagency coordination-that       suggest USDA needs to improve
                       the way it provides field services and reduce administrative costs.



                       Page 45                                          GAO/RCEDW-142   1990 Farm Bill
                  Section 7
                  Management




                  To move toward changing the field structure, USDA needs to marshal the
                  proper mix of leadership from headquarters and input from its state and
                  local offices. Commitment from usrhi’stop management in pursuing a
                  more streamlined and efficient Department is a necessary first step.

                  Management analysts in both the private and public sectors generally
                  believe that a well-run organization is responsive to changes in its over-
                  all environment and conscious of controlling costs. USDA needs to periodi-
                  cally engage its top management, county offices, state and local Food
                  and Agriculture Councils, farm clients, and the Congress in seeking more
                  cost-effective methods for delivering its field services in an ever-chang-
                  ing agricultural environment. As part of this process, an assessment of
                  the mission, design, and service delivery system of its present field
                  structure could help USDAfoster an attitude receptive to change. The
                  Department risks a serious erosion in the quality and level of farm ser-
                  vices resulting from large-scale, ad hoc work force reductions if it does
                  not begin this task soon.

                  GAO   is evaluating USDA’Sfarm service delivery system and will present
                  its findings and recommendations to the Congress at a later date.


Suggestions for   With its ability to create, abolish, restructure, and fund federal depart-
Congressional     ments and agencies, the Congress has a pervasive influence over execu-
                  tive branch organization. The Congress should work more closely with
Consideration     USDA management to identify cost-saving opportunities in the delivery of
                  USDA programs and services. Even modest reductions in the size of USDA'S
                  $2. l-billion farm services delivery system can result in millions of dol-
                  lars in savings.

                  For more information, see U.S. Department of Agriculture: Interim
                  Report on Ways to Enhance Management, (GAO/RCED-90-19, Oct. 29, 1989)
                  and U.S. Department of Agriculture: Status of the Food and Agriculture
                  Councils Needs to E3eElevated, (GAO/RCED-90-29, Nov. 20, 1989) and the
                  forthcoming report on USDA'S field structure.




                  Page 46                                         GAO/RCED-9@142   l!WO Farm Bill
                       Section 7
                       Management




                       The time between the approval of legislation and program implementa-
Providing More         tion dates sometimes does not provide USDAagencies with sufficient time
Planning Time for      to adequately design, develop, and test computer software.
Developing Automated
systems

Background             USDA,  especially the Agricultural Stabilization and Conservation Service
                       (ASCS)and the Farmers Home Administration (M),          use information
                       technology and systems extensively in managing their programs. Since
                       the early 1980s ASCSand FNIHAhave spent about $300 million to install
                       computers in their approximately 5,000 state, district, and county
                       offices. The two agencies-having developed software systems to imple-
                       ment legislative and other program requirements-depend        on these sys-
                       tems to provide loan-making, price-stabilization, income-support, and
                       conservation services to farmers and other clients.


                       I+HA and AZJBmust often change their computer software to comply
                       with program changes directed by legislation. The Congress sometimes
                       requires USDAto implement these changes in a relatively short amount of
                       time-sometimes within 30 to 75 days after legislation is approved. This
                       amount of time is insufficient for the agencies to prepare and issue
                       implementing regulations and instructions and then design, develop, and
                       test the computer software needed to implement these changes.

                       To implement legislation quickly, FI-IIHAand ASCSmust shortcut the soft-
                       ware development and testing process, which results in inadequately
                       tested computer software that contains errors when sent to the field
                       offices. The field office staff have to “make do” with this flawed com-
                       puter software or revert to less efficient manual procedures until the
                       software is corrected. This results in increased administrative burdens.

                       Using flawed software can result in inaccurate loans or farm payments.
                       Relying on imperfect software for farm program information can also
                       cause farmers to make incorrect production decisions during enrollment.
                       Consequently, farm legislation, if implemented too quickly, may not
                       have its intended effect on crop production or conservation practices.

                       Additionally, insufficient development time limits how well system
                       developers can document changes to software systems. Without proper
                       documentation, system analysts have difficulty correcting errors and


                       Page 47                                         GAO/‘ECED!J@142   1990 Farm Bill
                     !Tkction 7
                     Management




                     understanding how the software functions, which can cause subsequent
                     system changes to be susceptible to more errors.


Suggestions for      In setting deadlines for implementing farm program legislation, the Con-
Congressional        gress should provide USDAwith sufficient time to design, develop, test,
                     and document computer software. Doing so would improve service qual-
Consideration        ity, help ensure that the legislation is properly implemented in field
                     offices, and reduce USDA’Sadministrative burden.

                     For more information, see Agriculture: Progress Made Toward Goals of
                     1985 Farm Bill (GAO/RCED-~~-~~BR, Mar. 30,1989).


                     Increased data-sharing among agencies can help USDAprovide services
Improving Program    more efficiently and effectively.
Management Through
More Data-Sharing

Background           USDA’Sfarm agencies use administrative and operational information
                     systems to deliver program benefits-primarily       credit, commodity sup-
                     port, and soil and water conservation programs-at       state and county
                     offices. Beginning in the early 1980s in response to increasing work
                     loads, USDAautomated these systems to improve productivity and
                     increase efficiency. However, little attention was paid to integrating
                     these data bases. For the most part, these agencies still use separate
                     data bases to collect, process, and report program data. Over the next
                     5 years, USDAprojects that it will spend $3.2 billion for information
                     resource management.


Analysis             Farm programs are becoming more interdependent and thus require
                     more data-sharing. The 1985 farm bill, for example, requires USDAagen-
                     cies to share conservation data with state governments and other fed-
                     eral agencies. The Agricultural Stabilization and Conservation Service
                     (ASCS)and the Soil Conservation Service also have increasing needs to
                     share data to accomplish their missions, and the new farm bill’s
                     expected emphasis on the environment and food safety will require
                     additional data-sharing. In addition, to avoid paying benefits to ineligi-
                     ble farmers, ASCSand the Farmers Home Administration must share pro-
                     gram information. A recent USDA Office of Inspector General audit



                     Page 48                                         GAO/‘RCED-$I@142   1990 Farm Bill
                  Section 7
                  Management




                  uncovered millions of dollars in payments made to ineligible farmers-
                  payments that might have been avoided with an integrated data base
                  shared by AXS and the Farmers Home Administrati0n.l New design,
                  integration, and data transmission technologies offer USL)Aopportunities
                  to establish common data bases and share data more effectively.

                  In addition, during USDA’S1985 streamlining initiative, five state Food
                  and Agriculture Councils submitted proposals to improve data-sharing
                  among USDA agencies operating in the field. One council reviewed the
                  data needs of each USDAagency operating within its state and identified
                  12 areas where common data bases could improve the operations of 2 or
                  more of 5 USDA agencies.

                  USDA  agencies have begun to plan to share data among programs and
                  agencies, but so far they have made little progress. USDA, for example,
                  has not agreed on common data definitions, which is a critical first step
                  in sharing data. Furthermore, management information needs are not
                  specified in agencies’ 5-year plans. As a result, the data bases that have
                  been developed do not support the basic management need to share
                  data.

                  GAO is evaluating USDA'S management of information resources and will
                  present its findings and recommendations to the Congress at a later
                  date.


Suggestions for   To improve USDA’S management planning for information resources, the
Congressional     Congress should encourage USDAto share data among programs and
                  agencies to the maximum extent possible.
Consideration
                  For more information, see USDA: Interim Report on Ways to Enhance
                  Management (GAO/RCEDQO-19) and the forthcoming report on USDA
                  management.




                  ‘Audit of the Unauthorized Use of Farmers Home Administration Inventory Farm Property (Audit
                  Report No. 50099-20-AT, May 17,1989).



(160010)          Page 49                                                      GAO/'RCED9@142199O FarmBill
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