Educational Package on Payment Limitations

Joe L. OutlawAssociate Professor & Extension Economist

Texas Cooperative Extension

National Public Policy Education ConferenceSalt Lake City, Utah

September 22, 2003

Presentation Outline• 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:– 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:– 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 Payments34% of all Farms in 2001

Of farms receiving payments:

Rural residence

farms (273,000)

Intermediate farms(330,000)

Commercial farms(123,000)

Avg. net cash income

2,256 17,961 124,220

Avg. gov. payments

4,827 13,865 60,532

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

Effect of Current Limits on Payments

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2001 2001

Bil

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lars

Amount not paid out due to limits

PFC

Mktloss

Loan benefits

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 5.2% farms harvest>1,000 ac.

Soybeans 3,565 1.9% farms harvest>1,000 ac.

Upland cotton 1,176 10.1% farms harvest>1,000 ac.

Rice 416 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