Most of the programs that support farm income, promote agricultural research, and enhance marketing opportunities for farmers are contained in function 350. Those activities are administered by the Department of Agriculture. Mandatory programs—which account for most of the spending—include revenue support for producers of major crops (including corn, cotton, soybeans, and wheat), crop insurance, and farm credit programs. Discretionary programs include agricultural research and extension, economic analysis and statistics collection, plant and animal health inspection, agricultural marketing, and some international food aid. The Congressional Budget Office estimates that outlays for function 350 will total $20 billion in 2007.

Spending for farm income-support programs, which extends through 2007 under the Farm Security and Rural Investment Act of 2002, is projected to decline from $18 billion in 2006 to $10 billion in 2007 because of higher crop prices caused by strong demand from abroad, increased demand for ethanol (a gasoline additive made from corn), and crop damage attributable to recent bad weather across the country. The decrease in spending for the farm income-support programs is partially offset by an increase in spending for the federal crop insurance program, as higher crop prices bolster the value of crops and insurance alike.

The Initiative for Future Agriculture and Food Systems is a competitive grant program designed to support research, extension, and education activities in areas designated as priorities for U.S. agriculture. The program funds research into and activities involving food genomics, food safety, human nutrition, alternative uses for agricultural commodities, biotechnology, and "precision farming" (which entails the precise monitoring and control of livestock as well as crop- or forest-management practices focusing on a specific area rather than on an entire field or forest). The Agricultural Research, Extension, and Education Reform Act of 1998 created and provided mandatory funding for the initiative. The program was reauthorized in the Farm Security and Rural Investment Act of 2002 and was mandated to receive rising annual appropriations—$120 million for 2004, growing to $200 million for 2007 and later years. The Deficit Reduction Act of 2005 suspended funding for the program until 2010.

This option would eliminate the Initiative for Future Agriculture and Food Systems, reducing mandatory outlays by $30 million in 2010 and by $290 million through 2012.

One argument for ending the program is that, if agricultural research needed federal support, it might be able to receive that support through discretionary funding (which is subject to annual Congressional review) rather than mandatory funding. That is the approach used for another $2 billion or so of agricultural research funding elsewhere in the Department of Agriculture's budget. For most of the program's existence, the Congress has chosen to block mandatory funding for the program in the appropriation process and divert the budgetary savings to other purposes. Further, because each year's funding is made available for obligation over two years, annual appropriations language prohibiting spending for the program could be credited with saving the same funding twice (for example, the $200 million in funding authorized in 2010 could be blocked in the appropriation process both in 2010 and 2011). Finally, federal funding for agricultural research might merely be replacing private funding and thus not filling a vital national need.

The main rationale for keeping the initiative is that various factors—such as competition from foreign producers, increased attention to food-safety issues, and the growing pace of technological change in agriculture—have increased the need for research funding beyond what is available through traditional discretionary programs. More generally, the program may be important for improving agricultural productivity, environmental quality, and farm income.

The government supports producers of various farm commodities—including cotton, feed grains, oilseeds, peanuts, rice, and wheat—in three main ways. First, producers can receive direct payments on the basis of their historical production (those payments are not affected by market prices). Second, producers may be entitled to additional payments, known as countercyclical payments, which depend on market prices. Third, they can receive benefits from the marketing-assistance loan program, which essentially guarantees them a minimum price for their crop. Under that program, producers take out loans at harvest whose value is tied to the minimum price, using the crops from that harvest as collateral. If the market price falls short of the loan value in subsequent months, producers receive marketing-assistance loan benefits, which amount to partial forgiveness of the loan. Payments, which are made by the Department of Agriculture's Commodity Credit Corporation (CCC), are based on a specified amount per unit (bushel or pound) of eligible production on the farm. Hence, larger farms earn larger payments.

Since 1970, the amount that a producer can collect under those programs has been subject to a dollar limit. Currently, those limits are $40,000 for direct payments, $65,000 for countercyclical payments, and $75,000 for marketing-assistance loan benefits. However, the limits are per person, with "person" defined as including individuals, corporations, and other legal entities. An individual producer, therefore, might qualify for payments through up to three different farming entities, with the effect of receiving twice the nominal limits. For example, the producer could receive $40,000 in direct payments as an individual and $20,000 (up to a 50 percent share) in direct payments as an owner of two separate corporations that produced agricultural commodities, for a total of $80,000 in direct payments.

This option would cut the current payment limits in half for two of those programs—to $20,000 per person for direct payments and $32,500 per person for countercyclical payments—while retaining the three-entity rule. It would leave the cap on marketing-assistance loan benefits at $75,000 per person but would modify the program to include generic certificates and loan-forfeiture gains as part of that cap.¹ Savings in CCC payments would amount to $24 million in 2008 and $462 million over five years. Most of the savings would come from reducing the limit on direct payments, primarily because total countercyclical payments and marketing-loan benefits are projected to be relatively low over the next several years as a result of higher commodities prices.

Policy positions about payment limits, both pro and con, are heavily influenced by perceptions of fairness. Advocates of lowering the limits generally view the purpose of farm support programs to be keeping smaller, family farms in business, particularly those that are struggling financially. Payment limits are intended both to reduce overall federal spending on farm programs and to promote greater equity in the distribution of program benefits. Lower limits would not directly increase payments to small producers, but they would reduce the budgetary costs of the programs and the proportion of total payments going to large farms. Thus, supporters of the option maintain, lower limits could help small farms indirectly, slowing the rate at which such farms are lost by reducing larger farmers' incentives to buy them to expand operations.

Opponents of the option argue that farm programs are not intended or well suited to provide a more equal distribution of income among farm households. They also contend that payment limits undermine the competitiveness of U.S. agriculture in global markets. Some producer organizations have called for eliminating the limits altogether, saying that tighter restrictions on program benefits hurt the larger, more efficient farming operations that are better able to take advantage of economies of scale in production. Opponents also note that reducing the payment limits would affect different commodities and regions differently. Because cotton and rice have a relatively high value of program benefits per acre, most of the option's savings would come from producers of those crops, and the effect on the agricultural sector would be largest in the Southern and Western states where they are concentrated.

Direct and countercyclical payments to agricultural producers (described in Option 350-2) are expected to make up about 86 percent of the Commodity Credit Corporation's (CCC's) total spending for program commodities—wheat, feed grains, oilseeds, cotton, rice, and peanuts—over the next 10 years. Those payments are calculated as 85 percent of a producer's base acreage times an assumed yield per acre times a payment rate per unit (bushel, pound, or hundredweight) of production. In general, a farm's base acreage for each eligible crop is calculated as the average number of acres planted with that crop between 1998 and 2001. Direct and countercyclical payments are made regardless of what is currently produced on the farm; hence, those payments tend not to distort people's decisions about production. Program participants may also receive benefits for those commodities through marketing-assistance loans, which are paid according to actual farm production.

This option would reduce the eligible payment acreage for direct and countercyclical payments by 1 percentage point—from 85 percent to 84 percent. That change would lower the CCC's outlays for farm programs by $13 million in 2008 and by $300 million over the 2008-2012 period.

Producers of commodities that are not covered by direct and countercyclical payments—such as dairy products, dry peas, lentils, mohair, small chickpeas, sugar, and wool—receive federal benefits primarily through marketing-loan gains, loan-deficiency payments, or purchases. Proportionately reducing program benefits for those commodities to the reductions in this option would lower CCC spending by an additional $8 million over the 2008-2012 period. Such a decrease would most likely be accomplished through a reduction in the applicable marketing-assistance loan rate.

The primary advantage of reducing payment acreage is that it would yield significant savings with a relatively small adjustment in program provisions. The spending cuts would affect all program participants in proportion to their expected payments instead of disproportionately affecting producers of any particular commodity. In contrast, spending reductions resulting from changes in payment limits (the subject of Option 350-2) would tend to have a particularly large impact on producers of cotton and rice.

The main disadvantage of this option is that the cuts in commodity programs would target the least market-distorting payments (direct and countercyclical payments) rather than marketing-loan benefits, which essentially guarantee a minimum level for the prices received by participating producers of certain crops. In addition, although reducing payment acreage would be relatively straightforward, achieving proportionate reductions in spending for other commodities would be more complicated.

The Federal Crop Insurance Program protects farmers from losses caused by drought, flooding, pest infestation, and other natural disasters. Farmers can choose among policies that provide various levels and types of protection (for example, against yield losses only, or against both yield losses and low prices). Insurance policies that farmers buy through the program are sold and serviced by private insurance companies, which receive reimbursement for their administrative costs on the basis of the types of policies they sell and the amount of premiums they collect. Companies also share underwriting risk with the federal government and can gain or lose depending on the extent of crop losses and indemnity claims. Overall, the companies typically gain.

The maximum reimbursement rate for administrative costs was reduced in 1998 from 27 percent to 24.5 percent of premiums. In 2004, under the reinsurance agreement that was negotiated between insurance companies and the Department of Agriculture, the maximum reimbursement rate was reduced again, to 24.2 percent of premiums.

This option would further reduce the maximum rate to 23.2 percent of premiums (with comparable reductions for types of policies that are currently reimbursed at less than the maximum rate). That reduction in reimbursement rates would save $41 million in outlays in 2008 and $240 million over the 2008-2012 period.

Proponents of this option believe that lawmakers could cut the reimbursement rate below the rates agreed to in 2004 without substantially affecting the quantity or quality of services provided to farmers, partly because total insurance premiums and reimbursements have been rising faster than the administrative costs of selling and servicing policies. They note that, notwithstanding the rate reduction in 2004, reimbursements per acre insured increased by over 25 percent between 2000 and 2006, to some extent because coverage levels on acreage already insured have increased, yielding higher premiums without a corresponding increase in administrative costs. (Increased coverage levels are one result of the Agricultural Risk Protection Act of 2000, which significantly lowered the cost of insurance to farmers.) Proponents also assert that even if cuts caused some companies to curtail services to farmers or to drop out of the market, other companies could take up the slack and that any effects on the program would not be significant.

An argument against this option is that further cuts could impair the ability of the crop insurance industry to sell and service policies and would threaten farmers' access to insurance. Opponents of the option point to the 2002 failure of the largest insurance company participating in the program as evidence that reimbursements for expenses are already too low and that further reductions would make it even harder for companies to maintain the services they now provide to farmers. If the crop insurance program failed, opponents say, lawmakers would be more likely to resort to expensive, special-purpose relief programs when disaster struck, negating any apparent savings from cutting the reimbursement rate.

The Department of Agriculture's Foreign Agricultural Service (FAS) administers various programs that promote exports of agricultural products from the United States and provide nutritional and technical assistance to other countries. In the Foreign Market Development Program, FAS acts as a partner in joint ventures with "cooperators"—such as agricultural trade associations and commodity groups—to develop markets for U.S. exports. The program, also known as the Cooperator Program, typically promotes generic products and basic commodities, such as grains and oilseeds, although it also covers some higher-value products, such as meat and poultry.

This option would eliminate funding for the Foreign Market Development Program, reducing mandatory outlays by $24 million in 2008 and by $160 million over five years.

Supporters of implementing the option argue that the Cooperator Program merely replaces private spending with public spending and that the cooperators should bear the full cost of foreign promotions because they directly benefit from those promotions. They also argue that the program's services duplicate those of FAS's Market Access Program (described in Option 350-6), which similarly works to create and expand foreign markets for U.S. agricultural products.

Opponents of the option argue that ending federal funding for the Cooperator Program could place U.S. exporters at a disadvantage in international markets because other countries provide support to their exporters. They also contend that the Cooperator Program does not duplicate other programs, partly because it focuses on basic commodities and sales to foreign manufacturers and wholesalers. Moreover, some analysts contend, the program helps the U.S. economy as a whole—not just the cooperators—by reducing the trade deficit. However, analysis shows that government efforts to support or subsidize exports have at best a temporary effect on the trade deficit, which is largely driven by the difference between domestic investment and domestic saving. Moreover, by distorting the allocation of economic resources, such efforts generally impose costs that exceed their benefits.

The Market Access Program, administered by the Department of Agriculture's Foreign Agricultural Service (FAS), provides funds to trade associations, commodity groups, and for-profit firms to help them build markets overseas for U.S. agricultural products. Under current law, funding for the program increased from $100 million in 2002 to $200 million in 2006 and ensuing years.

This option would reduce funding for the Market Access Program in 2008 and subsequent years to $140 million, the same level of funding authorized for the program in 2005. That change would reduce mandatory outlays by $231 million over the 2008-2012 period.

The Market Access Program promotes the export of a wide range of products, including eggs, fruit, meat, poultry, seafood, tree nuts, and vegetables. About 20 percent of the program's funding goes to promote brand-name goods. The program requires varying degrees of cost sharing: For promotions of brand-name products, cooperatives or small private firms must pay at least 50 percent of the overall costs; for promotions of generic products, trade associations and others must pay at least 10 percent of those costs.

Some supporters of this option argue that the Market Access Program does not warrant additional funding because the extent to which it has developed markets or replaced private expenditures with public funds is uncertain. Others argue that taxpayers' money should not be spent to advertise brand-name products and that participants should bear the full cost of foreign promotions because they directly receive the benefits. Further, some proponents of the option note that the Market Access Program duplicates the FAS's Foreign Market Development Program (described in Option 350-5), which also provides funds for overseas marketing. Lastly, those in favor of implementing the option say that federal intervention to promote exports distorts the allocation of economic resources and has no lasting impact on the trade deficit, according to analysis that indicates the deficit depends primarily on the gap between domestic investment and domestic saving.

An argument against reduced funding for the Market Access Program is that in recent years it has targeted its funds toward small companies and cooperatives and reduced the share that goes to promoting brand-name products. Furthermore, limiting the program could place U.S. exporters at a disadvantage in international markets because other countries support their exporters. On the issue of duplication, some opponents of this option maintain that the Market Access Program differs from other programs partly because it focuses on specialty crops, processed products, and consumer promotions.

The Department of Agriculture promotes the export of U.S. farm products through several credit guarantee programs administered by the Foreign Agricultural Service. Those programs protect exporters and banks in the United States against default on financing they provide to foreign importers and banks to cover purchases of U.S. goods. Under those programs, if the foreign recipients of export credit fail to repay what they owe, the federal government makes up most of the shortfall.

The principal export credit guarantee programs for agricultural products are the Export Credit Guarantee Program, which covers credit with repayment terms of up to three years, and the Supplier Credit Guarantee Program, which covers credit with terms of up to six months. The Department of Agriculture has implemented a series of changes to those programs over the past several years. In 2005, in response to findings by a dispute-resolution panel of the World Trade Organization, loan fees for the Export Credit Guarantee Program were increased, and higher-risk countries were excluded from the program. In 2006, in response to increasing loan losses, lending under the Supplier Credit Guarantee Program was suspended.

This option would restrict the repayment period for the Export Credit Guarantee Program to no more than six months, reducing mandatory outlays by $20 million in 2008 and by $167 million through 2012.

Supporters of this option contend that the credit guarantees of up to three years provided under the Export Credit Guarantee Program offer substantial benefits to participating foreign and domestic banks but have little, if any, impact on the overall level of U.S. agricultural exports. A September 1997 report by the General Accounting Office (now the Government Accountability Office) found little evidence that those programs provided measurable income or employment benefits to U.S. agriculture. Moreover, in ongoing multilateral trade negotiations, the United States has expressed support for limiting the term of its credit guarantee programs to no more than six months if other countries agree to eliminate their export subsidy programs. Furthermore, some advocates of the option argue that government programs that support or subsidize exports hurt the economy as a whole by distorting the allocation of economic resources and thus imposing costs that exceed their benefits.

Opponents of implementing this option say that the United States should not cut back its export credit programs without parallel changes in the export subsidy programs of other countries. Other advocates of the program maintain that the current longer-term credit guarantees reduce the cost of financing purchases and allow suppliers in the United States to increase sales in countries where they could not otherwise provide financing.