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/LDPDollars

Own farm 40,000 65,000 75,000A 20,000 32,500 37,500B 20,000 32,500 37,500

Total 80,000 130,000 150,000Grand total $360,000

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 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

Average Payments by Farm Type, 2001

Farm type Payments per farm*Cash grain $31,900

Oilseeds $15,800

Rice $116,600

Cotton $55,500

Other crops $12,100

Livestock $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

Effect of Current Limits on Payments

02468

10

1214161820

2001 2001

Bil

lion

Dol

lars

Amount not paid out due to limits

PFC

Mktloss

Loan benefits

Payment Reductions due to Current Limits in 2001, by Crop

Crop % Reduction

Corn 0.6

Wheat 0.6

Cotton 2.5

Rice 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 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.

Number of Persons per FSA Farm

Persons

1-2 3-5 6-10 11-20 21+

FSA Farms 1.6 mil. 198,890 19,222 2,289 325

Marketing Assistance Loan Benefits

0

1

23

4

5

67

8

9

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Bil

. $

LDPsMLGsCEGsTotal

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 on2000-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