Commodity Programs:

Impact of Support Provisions on Selected Commodity Prices

RCED-97-45: Published: Feb 21, 1997. Publicly Released: Feb 21, 1997.

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Pursuant to a congressional request, GAO reviewed the impact of support provisions on selected commodity prices, focusing on: (1) whether marketing loan provisions prevent loan rates from acting as price floors and whether they allow U.S. prices to fall to levels closer to world prices; (2) the effect lower loan rates would have on the relationship between U.S. and world prices; (3) the affect of a lower loan rate on step 2 payments for cotton exports and the impact of recent changes in timing of payments on the program's effectiveness; and (4) the steps that could be taken to make the peanut and sugar programs more market-oriented.

GAO found that: (1) when alternative repayment rates, which are derived from the U.S. Department of Agriculture's (USDA) proxies for world prices, are near or below the loan rates, the marketing loan provisions may prevent the loan rates from serving as price floors; (2) lowering the loan rates has little if any effect on U.S. prices when alternative repayment rates are above the loan rates; (3) however, when alternative repayment rates are near or below the loan rates, the effect on U.S. prices of lowering the loan rates differs by commodity; (4) for cotton and rice, the availability of nonrecourse loans, in combination with other program and market factors, keeps U.S. prices significantly higher than adjusted world prices; (5) therefore, lowering the loan rates is likely to allow U.S. prices to fall to levels that are closer to adjusted world prices; (6) for wheat, feedgrains, and oilseeds, most experts assert that the marketing loan provisions will work as intended to overcome the price-supporting effects of the nonrecourse loans; (7) for these crops, lowering the loan rates would have little if any impact on U.S. prices; (8) to the extent that a lower loan rate results in lower U.S. cotton prices, step 2 payments would be reduced but not eliminated; (9) step 2 payments would continue to be made because the marketing loan provisions have not been able to overcome the cotton program's other features, such as government-paid storage, that help keep U.S. cotton prices higher than adjusted world prices; (10) however, because of recent changes in how USDA makes step 2 payments to exporters, these payments may no longer directly offset higher U.S. prices and therefore may be less effective in enhancing exports; (11) further changes can be made to make the peanut and sugar programs more market-oriented; (12) additional reductions in the quota support price for peanuts will lower U.S. prices and increase economic efficiency; (13) an increase in the tariff-rate import quota for sugar, allowing more sugar to be imported at the lower tariff rate, or its elimination entirely (no import restrictions), would result in lower U.S. prices; and (14) once prices fall to the level of the loan rate, reductions in the loan rate would be necessary to reduce prices further.

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