Mandatory Spending Option 5

Function 350 - Agriculture

Eliminate ARC and PLC Payments on Generic Base Acres

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Outlays 0 0 -0.1 -0.6 -0.6 -0.6 -0.6 -0.6 -0.6 -0.6 -1.2 -4.2

This option would take effect in June 2018.

The Agricultural Act of 2014 replaced the existing agricultural support programs with the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs. The law also removed upland cotton from the list of commodities eligible for payments available to producers with base acres (those acres with a proven history of being planted with covered commodities established with the Department of Agriculture under statutory authority granted by previous farm bills). Finally, the 2014 law assigned upland cotton base acres to a new category called generic base acres and allows for ARC and PLC payments on generic base acres if producers plant a covered commodity on those acres.

Beginning in crop year 2018, this option would eliminate ARC and PLC payments on generic base acres. Most savings from eliminating ARC and PLC payments on generic base acres would begin in fiscal year 2020, when ARC and PLC payments for the 2018 crop year would be made. Because of its likely effects on peanut planted acres, the option also would, starting in 2019, lead to lower outlays for the government’s peanut marketing loan program. The Congressional Budget Office estimates that savings under this option would be $4 billion through 2026.

Linking payments on generic base acres to current (rather than historical) planting decisions is a departure from previous farm support programs, which had sought to decouple support payments from planting decisions to limit subsidies that may distort agricultural markets. Arguments in this option’s favor relate to removing such potential distortions, particularly as they relate to peanuts. Motivated by a high peanut PLC support price, growers have disproportionately planted peanuts on generic base acres to collect larger payments. The number of acres planted with peanuts increased by 27 percent in 2014 and by 20 percent in 2015, and ending stocks (the quantity of peanuts remaining in storage at the end of the crop year) for 2016 are projected to be slightly less than the record-high peanut stocks at the end of 2005.

The increase in acres planted with peanuts has had a large negative effect on U.S. peanut prices paid to farmers because the market for the crop is relatively small and inelastic. Peanut prices decreased by 12 percent during the 2014–2015 marketing year and by an additional 12 percent in 2015–2016. As a result of those price declines, per-acre payment rates in 2014 and 2015 were higher for peanuts than for any other covered commodity. At the same time, the income of peanut growers who do not have base acres (albeit a small segment of peanut growers) has been dampened. This option would cut the link between program payments and planting decisions. Planted acreage for peanuts would be expected to contract, increasing the market price for peanuts and the share of peanut growers’ income that is not accounted for by government spending.

In addition, this option might avert potential World Trade Organization (WTO) challenges to the U.S. peanut program. Government support has enabled domestic peanut sellers to sell more peanuts internationally than they otherwise might have. That increase has drawn the attention of peanut-exporting countries, who might argue that such an arrangement violates WTO rules.

One argument against this option is that some producers of covered commodities would receive less federal support. Although peanut prices paid to farmers might rise without payments on generic base acres, many growers appear to favor the income stability fostered by the federal programs.