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Payment Limits

Payment Limits. What is the Issue? Brief History of Payment Limitations Payment Limit Commission What Does the Data Indicate? Payments Certificates Estimated Impacts of Tightening Limits Conclusions. Brief History of Payment Limitations. Payment limit debate began in late 1960s

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Payment Limits

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  1. Payment Limits • What is the Issue? • Brief History of Payment Limitations • Payment Limit Commission • What Does the Data Indicate? • Payments • Certificates • Estimated Impacts of Tightening Limits • Conclusions

  2. 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.

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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 DirectCCPMLG/LDP Dollars Own farm 40,000 65,000 75,000 A 20,000 32,500 37,500 B 20,00032,50037,500 Total 80,000 130,000 150,000 Grand total $360,000

  8. 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 personalmanagement • Contributions must be commensurate with shares and must be at risk

  9. Distribution of PFC Payments, 2001$4.1 bil. Paid to 1.2 mil. Payees

  10. 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

  11. Farms Receiving Government Payments34% of all Farms in 2001

  12. 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

  13. Effect of Current Limits on Payments PFC Mkt loss Amount not paid out due to limits Loan benefits

  14. Base Acres Needed to Reach $40K in Direct Payments

  15. 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

  16. Effects of Further Limitations on:1--Farm Income • Reducing direct limit to $30K, CCP to $50K and loan benefit to $75K: • Direct payments fall $255-275 mil. • CCP payments fall $400-425 mil. • Loan benefits fall $400-500 mil. • Reductions: 4-5% of payments • Producers affected: rises to 35,000 from 12,000 farms • States most affected: CA, AZ, AR, MS

  17. 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

  18. 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

  19. 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

  20. 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

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