Report of the Payment Limit
Commission
Keith Collins
Commission’s Statutory Charge
• Assess effects of further limitations for direct,
counter-cyclical payments and marketing loan
benefits on:
–
–
–
–
Farm income
Farm land values
Rural communities and agribusiness infrastructure
Planted area of covered commodities and supply and
prices of all commodities
• Recommendations as Commission determines
appropriate
Commission’s Other Charge
Report language:
“Examine the feasibility of improving the
application and effectiveness of payment
limitation requirements, including the use of
commodity certificates and the unlimited
forfeiture of loan collateral.”
Commission Members
• 3 Members Appointed by House Agriculture Committee
--Gary Black (Georgia); Gary Dyer (Arizona);
Richard Newman (Texas)
• 3 Members Appointed by the Senate Agriculture Committee
--Terry Ferguson (Illinois); Ellen Linderman (North Dakota);
Neil Harl (Iowa)
• 3 Members Appointed by the Secretary
--Alice Devine (Kansas); William Spight (Mississippi);
Ed Smith (Texas)
• Keith Collins (Chairman)
Commission Timeline
• Late January 2003: first meeting
• March 2003: Commission solicited public comments
--375 comments received
• June 17, 2003: public workshop held on
--9 invited speakers and several members of the public
provided comments
• August 2003: final meeting held
--From January-August, 9 meetings held in which several
experts were invited to provide information
• September 2003: report released
Current Payment Limitations
• $40,000 per “person” for direct payments
• $65,000 per person for countercyclical
payments
• $75,000 per person for loan deficiency
payments and marketing loan gains
Background: A Person
• A person is the unit to which payment limits
apply—it may be an individual, an individual in a
joint operation, or other entity: trust, limited
partnership, corporation
• Under the 3-entity rule, an individual who receives
payments may also receive payments from up to 2
other entities in which the individual has up to a
50% interest
Background: An example of maximum
payments an individual may receive
Producer has own operation, 50% interest in trust A
and 50% interest in corporation B
DirectCC
MLG/LDP
Dollars
Own farm
A
B
Total
Grand total
40,000
20,000
20,000
80,000
65,000
32,500
32,500
130,000
$360,000
75,000
37,500
37,500
150,000
Background: To be Eligible a Producer
Must be Actively Engaged in Farming
• Must provide:
Land, equipment or operating capital
and
Active personal labor or active personal
management
• Contributions must be commensurate with
shares and must be at risk
Distribution of PFC Payments, 2001
$4.1 bil. Paid to 1.2 mil. Payees
Payment size
% of
payees
% of
payments
$10,000 or less
91
43
$10-30,000
8
39
$30,000 or more
1
18
Certificate Exchange Gains by State, 2001
State
Gains (Mil. $)
Arkansas
203
California
189
Georgia
146
Louisiana
113
Mississippi
256
Texas
300
Subtotal
1,207
U.S. total
1,700
Distribution of Certificate Exchange Gains, 2001
Payment size
% of
payees
% of
payments
$50,000 or less
61
12
$50-150,000
25
30
$150,000 or more
14
58
Farms Receiving Government Payments
34% of all Farms in 2001
Of farms
Rural
Intermediate Commercial
receiving
residence
farms
farms
(330,000)
(123,000)
payments:
farms (273,000)
Avg. net cash
2,256
17,961
124,220
income
Avg. gov.
4,827
13,865
60,532
payments
Share of:
Farms
38
45
17
Payments
10
34
56
Production
7
27
66
Average Payments by Farm Type,
2001
Farm type
Cash grain
Oilseeds
Rice
Cotton
Other crops
Livestock
Payments per farm*
$31,900
$15,800
$116,600
$55,500
$12,100
$9,300
*For farms receiving government payments. About 20% of other crop and 40% of
livestock farms received government payments in 2001.
Current Limits Do Not Reduce
Payments Appreciably
Why?
• Most farms are not large enough to trigger
limits, although farms in 43 states hit limits
in 2001
• Large farms have multiple persons
(payment limits) per farm
• No limit on marketing loan benefits
Billion Dollars
Effect of Current Limits on Payments
20
18
16
14
12
10
8
6
4
2
0
PFC
Mkt
loss
Amount not paid
out due to limits
Loan
benefits
2001
2001
Payment Reductions due to Current
Limits in 2001, by Crop
Crop
Corn
Wheat
Cotton
Rice
% Reduction
0.6
0.6
2.5
1.1
Base Acres Needed to Reach $40K in
Direct Payments
Crop
Base acres
Comment
Corn
1,636
1.5% farms
harvest>1,000 ac.
Wheat
2,623
Soybeans
3,565
5.2% farms
harvest>1,000 ac.
1.9% farms
harvest>1,000 ac.
Upland cotton
1,176
Rice
416
10.1% farms
harvest>1,000 ac.
19.9% farms
harvest>500 ac.
Number of Persons per FSA Farm
1-2
FSA Farms
Persons
3-5 6-10 11-20
1.6 mil. 198,890 19,222
2,289
21+
325
9
8
7
6
5
4
3
2
1
0
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
Bil. $
Marketing Assistance Loan Benefits
LDPs
MLGs
CEGs
Total
Certificates
• Used to facilitate marketing loan administration
• Used to avoid loan forfeitures, gain not s.t. limits
• Nonrecourse loan makes LDP/MLG limit ineffective
• Use of certificates with nonrecourse loan has little
consequence for taxpayers, slight increase in farm
income, and avoids market disruption of forfeitures
Effects of Further Limitations on:
1--Farm Income
• Reducing direct limit to $30K, CC to $50K and
loan benefit to $75K:
Direct payments fall $255-275 mil.
CC payments fall $400-425 mil.
Loan benefits fall $400-500 mil.
• Reductions: 4-5% of payments
• Producers affected: rises to 35K from 12K
• States most affected: CA, AZ, AR, MS
Regional Effects of Further Limitations
Percent of Producers Having Payments Reduced Under
$30,000 Limit on 2000-Crop PFC Payments
Zero
0.1-3 Percent
3 -10 Percent
10-20 Percent
More than 20 Percent
Percent Reduction in Payments Under $30,000 Limit on
2000-Crop PFC Payments
Zero
0.1-3 Percent
3-6 Percent
6-10 Percent
More than 10 Percent
Effects of Further Limitations on:
2--Farmland Values
• 15-25% of land values due to gov. payments, but
many factors determine land values
• Non-operator landlords rent out 41% of farmland
• Reducing limits to $30/50/75K would reduce rental
rate and land values. Modest national effect;
possibly large regional effects
Ariz. & Calif: 25% or more of producers
would reach limit
• Effects greatest in Delta, So. Plains, followed by
Southeast and rural areas of Far West
Effects of Further Limitations on:
3--Rural Communities & Infrastructure
• 316 out of ~2,300 rural counties are farm
dependent
• Vulnerable areas: county income dependent on
farm income, farm income dependent on payments,
high proportion of producers affected
• Short-run effects greatest in Delta, West Tex. , rural
Ariz. & Calif., Western Kan., Eastern Neb. & So.
Dak., Western Iowa
– Lower acres, farm income & spending, but
higher crop prices & lower rents. Effects
diminish over time
• Long-run effects largely unknown: farm structure
less important than technology, economic diversity,
natural amenities
Effects of Further Limitations on:
4--Commodity Supply and Prices
• Limits on decoupled payments expected to have
minimal effect; main effect is limits on loan
benefits
• Planted acres decline: modest national effect but
larger effect for cotton and rice
– E.g., cotton: 0.5 to 1.2 to 2.5 mil ac.
• Limited effect on F&V due to climate, lack of
market outlets, need for contracts, investment,
negative effects of shifts. Shifting to hay a
likelihood
• Effects diminish over time
Commission Recommendations--1
• General:
--Delay change until next farm bill or allow adequate
phase-in time
--Increase compliance resources at FSA/OIG
--Avoid incentives to create business organizations
for payment purposes
--Avoid changes that force risk shifting from
landlord to tenant
--Changes should be meaningful, transparent and
simple and sensitive to commodities, regions,
existing infrastructure
--Information and analysis
Commission Recommendations--2
• “Actively engaged” should be strengthened by
combining active labor and management and
making it meaningful and measurable
• Direct attribution would improve transparency,
administration, efficiency
– Attribute payments through entities to individuals
– Entities still qualify for payments but interests must be
actively engaged in agriculture
– Landowner/share rent exemption would continue
Commission Recommendations--3
• Commission divided on imposing payment limits
on forfeiture and certificate gains
• Key issue is whether to limit nonrecourse loans
– Some see loans as fundamental to income stability and risk
management and any limitation would reduce production,
efficiency, and rural infrastructure
– Others believe loan benefits should limited to production on
family-size operations. They argue such a limit would reduce the
income derived from economies of scale, lowering land values and
slowing farm consolidation with associated benefits to rural
communities