U.S. Department of Agriculture:

Marketing Assistance Loan Program Should Better Reflect Market Conditions

RCED-00-9: Published: Nov 23, 1999. Publicly Released: Nov 23, 1999.

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Pursuant to a congressional request, GAO reviewed the effects of the marketing assistance loan program on cash payments to farm producers, focusing on: (1) which producers received cash payments through the program, by type of crop and state; (2) why some producers did not participate in the program; and (3) what types of concerns have been raised about the program's effect on cash payments and potential forfeitures.

GAO noted that: (1) as of September 1999, $3.4 billion of the $3.7 billion in cash payments went to producers of four crops-corn, soybeans, wheat, and upland cotton; (2) the top 10 states in which producers received this assistance were Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, North Dakota, Ohio, South Dakota, and Texas; (3) some producers of eligible crops did not participate in the marketing assistance loan program in 1998 and could not receive a loan deficiency payment because: (a) the posted county price for their crop equaled or was higher than the applicable loan rate; (b) they had sold their crop before requesting a loan deficiency payment and therefore were no longer eligible for a payment; or (c) they had produced crops, such as rye, that were not covered by the program; (4) as the use of the marketing assistance loan program increased, producers and Department of Agriculture (USDA) officials raised a number of concerns about: (a) inconsistencies in the cash payments available to some producers but not to others; and (b) the heightened potential for loan forfeitures; (5) they pointed out that because the rates for loan deficiency payments have been consistently higher in some counties than in nearby or adjoining counties, the program's design has created an incentive for producers to move their grain from one county to another to receive a higher payment; (6) because of the way USDA established its loan rates and posted county prices, producers of classes of wheat that have higher market prices have received, or are likely to receive, lower rates for loan deficiency payments than producers of classes of wheat that have lower market prices; (7) on the other hand, producers of lower-priced classes of wheat have been able to receive higher rates for loan deficiency payments; (8) because the national loan rates for some crops, such as soybeans, were set at levels that cover significantly more of production costs than the national loan rates for other crops, an incentive has been created to plant crops in response to government payments rather than to market demand; (9) the program had a cash payment limitation of $75,000; (10) USDA officials told GAO they were concerned that producers would use the program's loan component to obtain financing and would forfeit their collateral to the government once they reach the payment limitation; (11) the Secretary of Agriculture has not yet made the changes he could make to the program because of concerns about decreases in some producers' income during a period of low crop prices; and (12) other possible changes to the program's design would require legislation.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: In the Farm Security and Rural Investment Act of 2002, the Congress revised the process for setting rates to establish and update the national and local loan rates for each crop to provide financing and price guarantees that better reflect market conditions.

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

    Agency Affected: Department of Agriculture

 

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