More payment limit rules should be delayed

That’s the recommendation of a commission created to study the effects of further limitations for direct and counter-cyclical payments and marketing loan benefits. The commission considered effects on farm income, farmland values, rural communities, agribusiness infrastructure and potential reductions in planted acreage.

The commission included ten members from across the farm belt with two, Richard Newman and Ed Smith, from Texas.

Smith, associate director for Agriculture and Natural Resources for the Texas Extension Service, reported on the commission’s findings recently at the Texas Commodity Symposium in Amarillo.

Smith said goals for payment limitations include: reducing government spending; preventing large operators from receiving excessive support; preventing wealthy non-producers from receiving payments; slowing down farm consolidation and bidding up of land values; and redistributing agricultural program spending.

He said 34 percent of all U.S. farms received government payments in 2001. The total includes 273,000 rural residence (small) farms, 330,000 intermediate farms and 123,000 commercial farms.

Net farm income from the rural residence farms averaged only $2,256 with average government payments of $4,827. Intermediate farmers average net income was $17,961 with $13,865 from government programs. Commercial operations averaged $124,220 and averaged $60,532 in government payments.

Those small farms make up38 percent of the total receiving government payments. Intermediate farms account for 45 percent and commercial farms come in at 17 percent.

Small farmers receive 10 percent of government payments; intermediate farms get 34 percent and commercial farms receive 56 percent.

But production figures provide a bit more insight. The 273,000 small farms produce only 7 percent of the commodities under farm programs; intermediate farms produce 27 percent. Commercial farms account for 66 percent of program crop production.

Rice farms averaged the highest payments, $116,600 per farm, followed by cotton at $55,500. Cash grain farms average $31,900; oilseed farms averaged $15,800; livestock averaged $9,300 and other crops $12,100.

“Current limits do not reduce payments appreciably,” Smith said. “Most farms are not large enough to trigger limits, although farms in 43 states hit limits in 2001.

“Also, large farms have multiple persons engaged in the operation and there is no limit on marketing loan benefits.”

Smith said the commission also considered the effect of certificates on farm income and government spending.

“Certificates facilitate marketing loan administration and help farmers avoid loan forfeiture. Gains are not subject to payment limits. Non-recourse loans make loan deficiency payments and marketing loan gain limits ineffective.

“Use of certificates with non-recourse loans has little consequence for taxpayers, produces a slight increase in farm income and avoids market disruption or forfeitures.”

So what happens with further payment limitations? Smith says reducing the direct payment limit to $30,000, the counter cyclical payment to $50,000 and the loan benefit to $75,000 cuts direct payments by $255 million to $275 million. The counter cyclical payments drop $400 million to $425 million and loan benefit payments fall $400 million to $500 million.

“The number of producers affected rises from 12,000 to 35,000 and farms lose from four percent to five percent of payments. States most affected would be California, Arizona, Arkansas and Mississippi.”

Smith said government payments account for 15 percent to 25 percent of farmland value. “But many factors determine the value of land. Non-operator landlords rent out 41 percent of farmland.”

He said reducing limits to the $30,000 DL, $50,000 CC and $50,000 loan benefit would reduce rental rates and land values. “National effect would be modest but regional effect could be significant.”

With those new limits Smith estimated that 25 percent or more Arizona and California farmers would hit the limit. “Effects would be greatest in the Delta and the Southern Plains, then the Southeast and rural areas of the Far West,” Smith said.

Smith said the commission could not determine the long-run effects of payment limitations on rural communities and the agriculture infrastructure within those communities.

“Vulnerable areas would include counties dependent on farm income and government payments.” Areas where a high proportion of producers get hit by limitations would be at risk.

Smith said the Delta, west Texas and the Upper Gulf Coast, rural Arizona, western Kansas, eastern Nebraska and South Dakota stand to be hit hardest in the short run. Effects could include fewer acres and less farm income and spending but higher crop prices and lower rent. “Effects diminish over time,” Smith said.

He said payment limitations should have minimal effect on commodity supplies and prices. Cotton and rice acreage could decline. Nationally, acreage reductions would be modest. Fruit and vegetable growers would see little effect but some growers could shift to hay production.

“Again, effects diminish over time.”

Smith said the commission developed recommendations for legislators contemplating changes in the farm program, the primary one to delay any change until a new farm bill or allowing adequate time for phase-in of changes.

Other recommendations include:

  • Increase compliance resources at the Farm Service Agency.
  • Avoid incentives to create business organizations for payment purposes.
  • Avoid changes that force shifting risk from landlords to tenants.
  • Changes should be meaningful, transparent, simple and sensitive to commodities, regions and existing infrastructure.
  • “Actively engaged” should be strengthened by combining active labor and management and making it meaningful and measurable.
  • Direct attribution would improve transparency. Attribute payments through entities to individuals. Entities still qualify for payments but entities must be actively engaged in agriculture. Landowner/share rent exemption would continue.
Smith said the commission was divided on imposing payment limitations on forfeiture and certificate gains. “The key issue is whether to limit non-recourse loans. Some see loans as fundamental to income stability and risk management. Any limitation would reduce production, efficiency and rural infrastructure.

“Others believe loan benefits should be limited to production on family-size operations. They argue that 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.”

Committee members’ opinions reflected, “How they view the goal of farm programs,” Smith said.

e-mail: [email protected]

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