Educational Package on
Payment Limitations
Joe L. Outlaw
Associate Professor &
Extension Economist
Texas Cooperative Extension
National Public Policy Education Conference
Salt Lake City, Utah
September 22, 2003
Presentation Outline
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What is the Issue?
Brief History of Payment Limitations
Payment Limit Commission
What Does the Data Indicate?
– Payments
– Certificates
• Estimated Impacts of Tightening Limits
• Commission Recommendations
• Conclusions
My Charge
To take the three presentations on payment
limitations in this session and condense them to
provide attendees with a 30-45 minute
presentation they can take home and use in their
states.
This is my version, all power point files from this
set have the same style/format – will allow you to
easily add other info.
Brief History of Payment Limitations
• Payment limit debate began in late 1960s
• Limits first enacted in 1970 farm bill at $55,000 and
ranged from $20,000 to $40,000 through 1985
• 1985 farm bill raised to $50,000 per “person”
– Initiated 3 entity rule
• 1990 farm bill established separate limits for deficiency
payments and MLG/LDP
• 2002 farm bill set direct payment limit at $40,000, CCP
at $65,000, and MLG/LDP at $75,000
– Introduced means testing for first time
• $2.5 million AGI limitation (3 year avg) unless 75% came
from Ag.
What is the Issue?
• Depends on a person’s point of view
– Proponents generally feel:
• Too much money goes to too few
• Large payments accelerate consolidation/industrialization
of agriculture
• Large farms don’t need the money
• Large payments lead to higher land values
– Opponents generally feel:
• Rules have been set and are being followed
• Business/investment decisions have been made based on
limits in current law
What is the Issue? (Continued)
• A person’s point of view tied closely to what they feel is
the goal of farm programs
• A few of the often cited goals are:
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–
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Foster an abundant supply of food and fiber
Support and stabilize farm income
Help producers get access to credit
Expand agricultural exports
Conserve natural resources
Maintain the family farm and the vitality of rural communities
Capitalize on the multiple functions of agriculture
Counter the protection provided to agriculture in other
countries
Payment Limit Commission
• Keith Collins, Chair with 3 members appointed by
each of Secretary, House, and Senate
• Assess effects of further limitations for direct,
counter-cyclical payments and marketing loan
benefits on:
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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
• Report came out at the beginning of September
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
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
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.
Certificates
• Used to facilitate marketing loan administration
• Used to avoid loan forfeitures, gain not s.t. limits
• Nonrecourse loan makes LDP/MLG limit ineffective
• Have primarily been used in cotton and rice
• Use of certificates with nonrecourse loan has little
consequence for taxpayers, slight increase in farm income,
and avoids market disruption of forfeitures
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
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
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
Conclusions
• The commission report provides support to
proponents and opponents of tighter limits
• Payment limit issue is not going away
– Momentum
– Federal budget situation
• Differences in a person’s position on this
issue can be tied to differences in their
perception of the goals of farm programs