Order Code RS21493
April 11, 2003
CRS Report for Congress
Received through the CRS Web
Payment Limits for Farm Commodity
Programs: Issues and Proposals
James Monke
Analyst in Agricultural Economics
Resources, Science, and Industry Division
Summary
Greater public awareness of sizeable commodity program payments reaching a
comparatively small number of very large farms and federal budget constraints have
focused the attention of Congress on payment limits. The policy issue is mostly about
farm size rather than the financial need of recipients, although the two may be related.
Limits on commodity program payments have been imposed since 1970. The 2002 farm
bill retains the former limits, adds limits for the new counter-cyclical program, and
incorporates new commodities. It also continues to permit the use of commodity
certificates to avoid the marketing loan limit.
In the 108th Congress, the Senate-passed version of the FY2004 budget resolution
(S.Con.Res. 23) contains a much-publicized amendment by Senator Grassley regarding
payment limits. Senator Grassley also introduced a bill (S. 667) to reduce direct and
counter-cyclical payment limits and count commodity certificates toward the marketing
loan limit. Translating the dollar limits into crop acreage levels makes it easier to see
how farmers might be affected. Lower payment limits most likely would be felt by
cotton and rice producers. This report will be updated as events warrant.
Background on Payment Limits
Payment limits restrict the dollar amount of farm program payments a “person” can
receive. They have been prescribed in the law since the Agricultural Act of 1970 (P.L.
91-524). The term “person” is defined more broadly than an individual, and can include
certain kinds of corporations, partnerships, and trusts.
The policy debate about the need for and level of payment limits continues in the
108th Congress. It is mostly about farm size and the purpose of farm programs. The
debate is not about financial needs of recipients, since farmers do not need to demonstrate
financial hardship to be eligible for commodity programs. Limits are intended to reduce
program expenditures and to address perceived inequities in payment distributions.
Congressional Research Service ˜ The Library of Congress

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Supporters of payment limits use both economic and political arguments.
Economically, they contend that large or unlimited payments benefit large farms, facilitate
consolidation of farms into larger units, raise the price of land, and put smaller, family-
sized farming operations at a competitive disadvantage. They say that smaller limits
would reduce financial incentives for farms to expand, and facilitate small and beginning
farmers in buying and renting land. Politically, they believe that large payments to large
farms undermines public support for farm subsidies and is costly to the federal budget.
Critics of payment limits counter that all farms are in need of support, especially
when market prices decline, and that larger farms should not be penalized for the
economies of size and efficiencies they have achieved. They say that such payments help
U.S. agriculture compete in global markets and that income testing is at odds with federal
farm policies directed toward improving U.S. agriculture and its competitiveness.
The effect of payment limits varies greatly across individual producers. Those
affected have relatively large land bases and production. Geographic location is also
important, with the South and West tending to have more large farms than the Upper
Midwest or Northeast, and thus more possibility of being affected by caps. Cotton and
rice farms also are more likely to be affected by the current limits because such farms tend
to be larger, and the value of program benefits per acre for those crops is relatively high.
Current Payment Limits Under FSRIA
The Farm Security and Rural Investment Act (FSRIA) of 2002, also known as the
2002 farm bill, retains annual limits on selected commodity program payments (P.L. 107-
171, sec. 1603). It adds limits for the new counter-cyclical program and incorporates
newly eligible commodities. It creates a prohibition on payments to persons or entities
with adjusted gross income exceeding $2.5 million (unless 75% or more comes from
farming). Table 1 shows the limits under the 1996 FAIR Act, the House- and Senate-
passed versions of the 2002 farm bill, the FSRIA as enacted, and the currently-proposed
Senate bill S. 667. The next section provides background on commodity payments and
how commodity certificates can be used in the marketing loan program.
The FSRIA preserves two mechanisms that enable payment limits to be doubled.
One is the “three entity rule.” This allows one person to receive payments on up to three
entities, with payment limits on the 2nd and 3rd entities being one-half of what a single
entity would receive. The other mechanism is the “spouse rule.” Generally, a husband
and wife are treated as one person for payment limit purposes. However, they can request
to be treated as separate persons and thereby double the payment limit for the farm. A
farmer can use only one of the two mechanisms to double the limit.
While the final 2002 farm bill did not enact the tighter payment limits, revise the
three-entity and spouse rules, or count commodity certificates and loan forfeiture toward
payment limits as proposed by the Senate, it did create a Commission on the Application
of Payment Limitations for Agriculture, chaired by USDA Chief Economist Keith Collins,
to investigate payment limits. Although, the commission’s report is due to Congress by
May 13, 2003, USDA has indicated that the report will be issued in summer 2003. The
commission has solicited written public comments and held private hearings.

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Table 1. Limits on Direct Payments, Counter-Cyclical Payments,
and Marketing Loans
104th
108th
2002 Farm Bill, 107th Congress
Congress
Congress

FAIR Act
House Plan
Senate Plan
2002 FSRIA
S. 667 ***
P.L. 104-127
H.R. 2646
S. 1731
P.L. 107-171
Direct and Counter-Cyclical Programs
Direct Payments
$40,000 *
$50,000
$40,000
$20,000
$75,000
Counter-Cyclical Payments
N/A
$75,000
$65,000
$30,000
Additional Payments Due to Three
$40,000 *
$125,000
$50,000
$105,000
50,000
Entity Rule / Spouse Allowance
Sum of Above Items
$80,000 *
$250,000
$125,000
$210,000
$100,000
Marketing Loan Program
(1) Marketing Loan Gains
$75,000 *
$150,000
$150,000
$75,000
$87,500
and (2) Loan Deficiency Payments
Additional Payments Due to Three
$75,000 *
$150,000
$0
$75,000
$87,500
Entity Rule / Spouse Allowance
Sum of Above Items
$150,000 *
$300,000
$150,000
$150,000
$175,000
Counted
Counted
(3) Commodity Certificates
No limit **
No limit
No limit
toward limit
toward limit
Counted
Counted
(4) Loan Forfeiture Gains
No limit
No limit
No limit
toward limit
toward limit
Practical Limit on Marketing Loan
No limit
No limit
$150,000
No limit
$175,000
Program
Sum of Direct, Counter-Cyclical, and Marketing Loan Programs
Total, Not Counting Use of Commodity
$230,000 *
$550,000
$275,000
$360,000
$275,000
Certificates or Loan Forfeiture
Practical Limit, Accounting for All
No limit
No limit
$275,000
No limit
$275,000
Payments Above
Notes: While payments for most qualifying commodities are combined toward a single limit, separate payment limits apply to
peanuts and other specialty crops in the House Plan, FSRIA, and S. 667. This provides certain producers a higher total potential
limit if they grow crops in each of the commodity groupings.
* Emergency farm economic assistance doubled limits under the FAIR Act for direct payments in 2000-2001, and for marketing
loans in 1999 to 2001 (P.L. 106-78, sec. 813; P.L. 106-387, sec. 837; P.L. 107-25, sec. 10).
** After the FAIR Act was enacted, P.L. 106-78, sec. 812, allowed commodity certificates to be exempted from payment limits
for repaying marketing loans.
*** S. 667 affects payment limits for covered commodities and most loan commodities, but would not change limits for peanuts,
wool, mohair, and honey.
Some conservation programs also have annual payment limits. These include the
Conservation Reserve Program ($50,000) and the Environmental Quality Improvement
Program ($30,000).
Relevant Commodity Payments Under FSRIA
Under FSRIA, farmers receive three types of commodity payments: direct, counter-
cyclical, and marketing loan payments. In all cases, subsidy payments are made per unit
of production (e.g., $ per bushel). Direct and counter-cyclical payments depend on a
farm’s historical base acreage and yields. The farmer is not obligated to grow the crop
to receive that crop’s direct or counter-cyclical payment, and may exercise planting

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flexibility without losing benefits. Instead payments are tied to each farm’s historical base
acreage and yields as defined in the commodity program. Even though the counter-
cyclical program also factors in market prices, it does not require the farmer to market any
particular level of that commodity since it uses historical production records.
The marketing loan program makes payments based on actual production when
market prices are below loan prices. It has four mechanisms to provide benefits, two of
which are subject to payment limits.
Subject to payment limits:
! Marketing loan gains (MLGs) accrue when commodity loans are repaid
at the posted county price (adjusted world price for cotton and rice), and
are effective when such prices are less than the loan rate.
! Loan deficiency payments (LDPs) are paid when farmers agree to forgo
loans but exercise a direct payment option. This allows farmers to
receive loan program benefits, but market their commodity without loan
restrictions that may hold grain off the market.
Exempt from payment limits:
! “Commodity certificates” are purchased from the Commodity Credit
Corporation (CCC) at the posted county price and are used to repay the
loan for less than the loan price. This alternative yields similar results to
MLGs. A 1999 law exempted the use of commodity certificates from
payment limits (P.L. 106-78, sec. 812).
! Forfeiting the collateral allows the farmer to retain the principal (cash)
in return for surrendering the collateral (commodity). The full loan price
thus becomes the effective payment. If this counted towards the payment
limit, more farmers would repay their loans since more of the commodity
could qualify for benefits (MLGs are smaller per unit than the loan price).
In Congress
Senate Budget Resolution. The Senate-passed version of the FY2004 budget
resolution (S.Con.Res. 23) contained a much-publicized amendment by Senator Grassley
regarding payment limits and the Conservation Security Program. During Budget
Committee debate on March 13, 2003, an amendment was incorporated by 14-9 vote to
reduce mandatory agriculture spending by $1.4 billion and increase mandatory
conservation spending by the same amount. The assumed reduction in farm program
spending would come from tighter payment limitations. However, the Senate budget
resolution did not contain specific reconciliation instructions and would only shift funds
within the total pool of money available to the Agriculture Committee. Thus the
Agriculture Committee, which has jurisdiction over both commodity and conservation
programs, would not be bound to propose any legislative changes in either program, even
if this budget resolution were adopted. The House-passed version (H.Con.Res. 95)
initially proposed much deeper cuts in agriculture programs, but did not specify the
method. As the House-Senate conference was pending, the House had limited its cuts in
agriculture to discretionary spending only, and not beginning until FY2004.
S. 667. On March 19, 2003, Senator Grassley introduced a bill that would reduce
payment limits on direct, counter-cyclical, and marketing loan payments. The statutory
limit (before doubling) on direct payments would decrease from $40,000 to $20,000; the
limit on counter-cyclical payments would decrease from $65,000 to $30,000. While the

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stated limit on the marketing loan program would rise slightly from $75,000 to $87,500,
the effective limit is reduced because commodity certificates and loan forfeiture would
be counted toward the limit. This is a key feature of the bill because, as a practical matter,
marketing loan payments are not limited under FSRIA since the limit on MLGs and LDPs
simply becomes the point at which the farmer shifts to commodity certificates.
Similar limits were proposed in the Senate-passed version of the 2002 farm bill (S.
1731, 107th Congress) by Senators Dorgan and Grassley, but those limits were not
accepted by the conference committee. That bill would have limited direct and counter-
cyclical payments to a combined $75,000, allowed only a $50,000 spouse benefit,
eliminated the three-entity rule and replaced it with direct attribution, limited the
marketing loan program to $150,000, and counted commodity certificates and loan
forfeiture towards the limit. Thus, the total limit would have been $275,000 also, but with
slightly different limits within each program and less generous doubling rules. In March
2003, CBO estimated that adopting such provisions would save $156 million in FY2004,
$883 million over 5 years, and $1.654 billion over 2004-13.
In S. 667, the proposed changes to direct and counter-cyclical payment limits would
apply to “covered commodities” as a group (wheat, corn, grain sorghum, barley, oats,
upland cotton, rice, soybeans and other oilseeds). The changes to the marketing loan
program apply to the covered commodities plus certain loan commodities (extra long
staple cotton, dry peas, lentils, and small chickpeas). Peanuts, wool, mohair, and honey1
are not addressed by S. 667, and thus would remain eligible for the higher limits enacted
in FSRIA, including unlimited use of commodity certificates and loan forfeiture.
S. 667 would establish a new rule allowing a person with an interest in only a single
farming operation to double the payment limits without needing to use the three-entity or
spouse rules, both of which would continue. Thus, individual farmers would have another
means and find it easier to double the payment limits. Finally, it would establish a
$275,000 cap per person for the total payments covered by the rules.
The bill instructs the Secretary of Agriculture to promulgate regulations to assure,
in effect, that all commodity program payments made to joint operations, multiple
entities, or other financial or management arrangements under the primary control of one
person are counted together toward the limits of the individual. The bill allows the
Secretary to promulgate such regulations in an expedited manner.
Size of Farms Affected
How large can a farm be before reaching the payment limits? Table 2 gives an idea
using a simple example for several crops. The example is hypothetical because it assumes
only a single crop is grown on a farm without using planting flexibility or crop rotations.
Although farm-level yields are used in practice, the table uses national averages for
comparison. Multi-year averages are used for price and yield so that no single year skews
1 The peanut support program under FSRIA duplicates the design for covered
commodities. Wool, mohair, and honey are eligible only for the marketing loan program.
The combination of peanuts, wool, mohair and honey are counted separately with regard
to payment limits.

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the results. Nonetheless, the table provides a useful comparison for different crops based
on payment rates, target prices, and marketing loans. Estimates are based on the limit for
a single entity; acreages would double if the 3-entity or spouse rule were used.
For direct payments, the table shows that an average farm could have 2,320 base
acres of wheat before reaching the $40,000 limit. A rice farm would reach the limit with
only 351 acres. If the maximum counter-cyclical payment were paid (that is, the season
average market price is less than the loan rate), a wheat farm would reach the $65,000
limit with 3,631 acres. The rice farm would need 813 acres. Thus, in this scenario, the
direct payment limit is more binding than the counter-cyclical payment limit for wheat,
corn, soybeans and rice, but the reverse holds for cotton.
For marketing loans, assuming that commodity certificates are not used to avoid
payment limits, the $75,000 limit would not be reached until the wheat farm exceeded
4,329 acres, or 3,236 acres for the rice farm. The table shows how cotton and rice farms
can reach one or more of the payment limits with fewer acres than wheat, corn, or
soybeans. This is especially noticeable since cotton and rice farms tend to be larger, as
indicated by the 1997 Agriculture Census. Cotton requires the smallest acreage to reach
the marketing loan limit, especially important if certificates become subject to the limit.
Table 2. Size of Farm Needed to Reach Payment Limits Under the
2002 Farm Bill – A Simple Example
Planting a single crop only, and
Wheat
Corn
Soybeans
Cotton
Rice
payment limits are not doubled.
Base acres to reach $40,000 direct
2,320
1,323
2,971
1,176
351
payment limit (1 person)
Base acres to reach $65,000 limit
with maximum counter-cyclical
3,631
1,771
5,901
928
813
payment rate (1 person)
Acres to reach $75,000 LDP based
4,329
2,347
4,267
1,712
3,236
on avg. harvest price and loan rate
Data:
Average acreage per farm (actual
241
162
186
420
336
planting, allowing multiple crops)
2002 farm bill
Direct payment rate
$0.52/bu.
$0.28/bu.
$0.44/bu.
$0.0667/lb.
$ 2.35/cwt.
Target price
3.86/bu.
2.60/bu.
5.80/bu.
0.724/lb.
10.50/cwt.
Loan rate
2.80/bu.
1.98/bu.
5.00/bu.
0.52/lb.
6.50/cwt.
U.S. average yield/acre, 1998-2001
42 bu.
136 bu.
38 bu.
642 lb.
61 cwt.
Payment yield (at 93.5%)
39 bu.
127 bu.
36 bu.
600 lb.
57 cwt.
Farm harvest price, avg. 1998-2001
$2.39/bu.
$1.75/bu.
$4.54/bu.
$0.452/lb.
$6.12/cwt.
Farm season price, avg. 1998-2001
2.63/bu.
1.90/bu.
4.62/bu.
0.462/lb.
6.17/cwt.
Prices and yields are from USDA, World Agricultural Supply and Demand Estimates. Average acreage from 1997
Agriculture Census. The example assumes a farm grows only a single commodity and does not use the three-entity or
spouse rules to double payment limits. Planting flexibility which, for example, allows a wheat farm to receive direct
and counter-cyclical payments for wheat but actually grow corn or soybeans (and receive marketing loans for the crops
actually grown) is ignored. Base acres are larger than payment acres (payment acres=85% of base acres). Payment
yields are computed using a formula to update program yields; for consistency, yields here are 93.5% of the 1998-2001
average. In practice, an individual would use farm-level yields, with annual production and prices to determine
marketing loans and counter-cyclical payments.

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