Agricultural competitiveness and environmental quality are increasingly consensus objectives for American agriculture. Yet the institutional interests undergirding agricultural policy are often at odds with those promoting improved environmental quality. This paper examines ways in which institutional reforms can improve both agricultural competitiveness and the environment. Farmers, like other business managers, make decisions based on information received from markets and other sources. This report shows how farm management as an activity responds to signals from commodity markets, federal agricultural policies, federal and state environmental regulations, and private sector and university extension recommendations. These individual signals are examined and compared in terms of their effect and compatibility. The signals are not always consistent, placing the farmer in a cross-fire between environmental critics and other interests that defend current agricultural practices. We examine four ways in which institutional reforms can improve both agricultural competitiveness and the environment. First, the world market should be the primary determinant of what is grown at the farm level. For markets to .work effectively, all policies, including trade and tax policies, must be conducive to a stable macroeconomic environment. Second, world market signals should not be distorted by farm policies which reduce planting flexibility and control supply. The "whole farm" base or Normal Crop Acreage proposals now under discussion in Congress have merit on both competitiveness and environmental grounds. Evidence from a variety of case studies clearly indicates that current programs place farmers in a position in which they must often forsake good agronomic practices which are environmentally responsible in order to retain program benefits. Income support to the farm sector, if paid on a whole farm base, would increase flexibility without increasing the risk of lost income due to changes in cropping practices or adoption of different agronomic practices. Indeed, support levels could even be structured to reward adoption of improved agronomic practices that enhance the environment. Third, even if federal agricultural policies were so reformed, there would still be an important role for specific policies designed to promote a variety of environmental improvements. But what appear in Washington to be effective environmental regulations appear to many farmers as misguided and ineffective. One set of environmental regulations affecting agriculture is based on denial of all farm program benefits to farmers who fail the conservation compliance, sodbuster and swampbuster tests of the 1985 Food Security Act. These provisions are difficult to uniformly enforce and are poorly designed, and should be amended to allow graduated penalties based on the degree of damage per acre. The Conservation Reserve Program (CRP) needs to be revamped so that its bidding process reflects true costs, and so that it is targeted to areas most in need of environmental protection. The CRP and the conservation compliance, sodbuster and swampbuster programs would all work more effectively if the acreage reduction program (ARP) were eliminated and a whole farm base adopted. This would lower the opportunity cost of permanent land retirement at the farm level, target such retirement specifically to acres low in productivity and high in environmental vulnerability, and increase the flexibility with which productive land could be used. The other set of environmental regulations affecting agriculture involve prohibitions on agricultural chemical use. The chemical-by-chemical registration process of EPA, in part because it has proceeded at a snail's pace, has actually hampered the development and marketing of more environmentally benign chemicals, while leaving other products in use. Legislation has established cancer risk at the lowest detectable level as the basis for prohibiting agricultural chemicals. This has led to restrictions on chemicals with much lower levels of risk than those now in use, and has failed to focus regulatory oversight where human health risks are actually highest. Finally, regulatory gridlock at the federal level has encouraged states to act unilaterally, creating a patchwork of state laws without any overarching pattern. Due to shortages of funds, states will be tempted to move in the direction of taxes on fertilizer or chemical inputs. Such taxes will raise farm costs but are unlikely, unless they are punitively high, to affect substantially the level of input use and thus environmental quality. In sum, current environmental policies hamper agricultural competitiveness, without substantial benefits to the environment, and are in serious need of reform. Fourth, research, extension and private sector recommendations will remain crucial to both improvements in environmental quality and to retaining the competitive posture of U.S. agriculture. Critics have emphasized the past preoccupation with yield increases to the exclusion of environmental concerns. Yet, there are opportunities for growth in technologies that address both goals. Research and extension need to focus on both productivity and environmental stewardship. Unfortunately, neither the regulatory nor the farm policy environment is providing positive incentives in these areas.