These factors vary by commodity program, and we have reported on them for cotton, peanuts, and sugar. Consequently, the 1990 farm act included a provision for step 2 payments to be made to exporters and domestic mills to offset higher U.S. prices. Marketing Loan Provisions May Eliminate Price Floors, but U.S. Cotton and Rice Prices Will Remain Higher Than Adjusted World Prices

When alternative repayment rates are near or below the loan rates, the marketing loan provisions may prevent the loan rates from serving as price floors. Therefore, we believe that it is necessary to observe what happens to U.S. prices during a period when the adjusted world price falls significantly below the loan rate in order to confirm that the marketing loan provisions prevent the loan rate for cotton from serving as a price floor, despite the effects of other program features and market factors that keep the U.S. price above the adjusted world price. The Effect of Lower Loan Rates on U.S. Prices Will Vary by Commodity

For all commodities, when U.S. prices and alternative repayment rates are above the loan rates, lower loan rates will have little if any effect on U.S. prices because producers can earn more by selling their commodities on the market than by forfeiting them to the government. Lower Loan Rate Would Not Eliminate the Use of Step 2 Payments, and Recent Changes to the Timing of Step 2 Payments May Diminish Their Effect on Exports

In this example, the adjusted world price ($0.55) is less than 130  percent of the loan rate ($0.65). However, since other program features (such as government paid-storage and import restrictions) and market factors contribute to making U.S. prices higher than world cotton prices, lowering the loan rate alone will not eliminate the use of step 2 payments. Recent changes in the timing of USDA’s step 2 payments to exporters may diminish this tool’s effectiveness in enhancing exports. This price could be reduced further, which would result in lower U.S. prices that would be closer to world prices and would also result in reductions in government costs. As long as USDA continues to use the tariff-rate import quota as it has in the past to restrict imports and support U.S. prices above the level necessary to prevent forfeitures, the 1996 farm act’s changes (such as limits on the availability of nonrecourse loans) will have little if any impact on U.S. prices. Once increases in the tariff-rate import quota result in U.S. prices dropping to the loan rate, reductions in the loan rate would be necessary to reduce prices further. Major contributors to this report are listed in appendix V.

Calculating the Benefits From Using the Marketing Loan Provisions

This appendix provides an (1) explanation of how to calculate the net amount that producers receive from the government when they use nonrecourse loans without marketing loan provisions, (2) analysis of how the marketing loan provisions are intended to operate and prevent the loan rates from acting as price floors, and (3) illustration of the differences in marketing loan benefits under various market conditions and the relationship between the alternative repayment rates and U.S. prices. For this review, we used USDA’s proxies for the world price for cotton, rice, wheat, feedgrains, and oilseeds. To identify additional changes that could be made to make the peanuts and sugar programs more market-oriented, we reviewed legislation and regulations, as well as reports from USDA.
Why GAO Did This Study

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.

What GAO Found

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.