Order Code RS21493
Updated September 1, 2006
CRS Report for Congress
Received through the CRS Web
Payment Limits for Farm Commodity
Programs: Issues and Proposals
Jim Monke
Analyst in Agricultural Economics
Resources, Science, and Industry Division
Summary
Payment limits set a maximum amount of farm commodity program payments per
person. Limits were created in 1970 and continue today. Federal deficits and perceived
inequities about the distribution of payments have heightened congressional attention.
In the 109th Congress, S. 385 and H.R. 1590 would tighten the limits and count
commodity certificates toward the limit. A Senate floor amendment to add payment
limits to the Deficit Reduction Act of 2005 (P.L. 109-171) failed by a procedural vote
of 46-53. In 2005 and 2006, the Administration proposed to tighten payment limits.
Tighter limits likely would affect more southern cotton and rice farms than
midwestern feed grain and oilseed farms. Fewer acres of cotton or rice are needed to
reach the limit since payments per acre generally are higher. This report will be updated.
Background on Payment Limits
Payment limits set a maximum amount of farm program payments a “person” can
receive (7 U.S.C. 1308). Limits have existed since the Agricultural Act of 1970 (P.L. 91-
524). The issue was controversial when the 2002 farm bill was written (the Farm Security
and Rural Investment Act, P.L. 107-171, Section 1603), and the policy debate continues
today. The debate usually focuses on perceived inequities about what size farms should
be supported, whether payments should be proportional to production or limited per
individual, and the need to reduce federal spending.
The effect of payment limits varies greatly across individuals and regions.
Geographically, the South and West tend to have more large farms than the Upper
Midwest or Northeast. By commodity, cotton and rice farms are affected more often
because the subsidy per acre is relatively higher.
What Payments Are Subject to Limits? Producers generally receive three
types of commodity payments: direct payments, counter-cyclical payments, and marketing
loans. Direct and counter-cyclical payments are relatively straightforward since they are
direct cash transfers. Marketing loans are more complicated since limits do not apply to
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some marketing loan options (see CRS Report RL33271, Farm Commodity Programs:
Direct Payments, Counter-Cyclical Payments, and Marketing Loans, by Jim Monke).
Subject to limits:
! Direct payments
! Counter-cyclical payments
! Some marketing loan benefits
— marketing loan gain (MLG): repay a loan for less than the original amount
and keep the difference as a marketing loan benefit
— loan deficiency payment (LDP): a cash payment instead of taking out a loan
Not subject to limits:
! Some marketing loan benefits
— commodity certificate gain: similar to a MLG; repay a loan with certificates
instead of cash (P.L. 106-78, Section 812, exempted commodity certificates)
— forfeiting the collateral (commodity) and keeping cash from the loan
Other farm programs have payment limits per person. These include the Milk
Income Loss Contract (MILC, 2.4 million pounds of milk annually), Conservation
Reserve Program ($50,000), and Environmental Quality Incentives Program ($30,000).
Who Receives Payments? One-third of the 2 million farms in the United States
receive subsidy payments, although the ratio is as high as 72% in North Dakota and 70%
in Iowa. Ten states received 53% of the total amount (Texas, Iowa, Georgia, Arkansas,
California, Illinois, Nebraska, Minnesota, Kansas, and Mississippi). About 708,000 farm
operators and 998,000 landlords received payments, with operators accounting for 54%
of payments. Half of the payments went to 5% of recipients (see CRS Report RL32590,
Average Farm Subsidy Payments, by State, 2002, by Jasper Womach). In addition to
individuals, certain corporations, partnerships, and trusts are eligible. The impact of
limits can be minimized legally by creating multiple entities to receive payments.1
How Many Farmers Are Affected? Little data are available on the current effect
of payment limits. USDA has developed, but not released publically, a new database that
was ordered in the 2002 farm bill (sec. 1614). The 2003 report of the Payment Limits
Commission provides data that is valid to compare with only one of the three current
payments. In 2000, about 1% of producers receiving payments were affected by the
$40,000 limit on what now are called direct payments.2 This amounted to 12,300
producers across 42 states, with an average reduction of $6,700. The total reduction in
direct payments was $83 million, or 1.6%. Payment reductions in California ($19.6
million) and Texas ($10 million) represented 36% of the total reduction. Reductions to
cotton farmers accounted for 60% of the cut in California and 35% of the cut in Texas.
1 Food and Agriculture Policy Research Institute (University of Missouri), Analysis of Stricter
P a y m e n t L i m i t s : A d d i t i o n a l I n f o r m a t i o n , J u n e 2 0 0 3 , p . 2
[http://www.fapri.missouri.edu/outreach/publications/2003/FAPRI_UMC_Report_06_03.pdf];
and USDA, Report of the Commission on the Application of Payment Limitations for Agriculture,
Aug. 2003, pp. 31-39 [http://www.ers.usda.gov/Briefing/FarmPolicy/paymentLimitsAll.pdf].
2 Report of the Commission on the Application of Payment Limitations for Agriculture, pp. 65-75.

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Current Payment Limits
Under the 2002 farm bill, the annual payment limit is $360,000 per person. The
limit has three parts including $40,000 for direct payments, $65,000 for counter-cyclical
payments, and $75,000 for marketing loan gains and loan deficiency payments. These
amounts add to $180,000, but can be doubled (Table 1). The $360,000 limit is not a firm
ceiling, however. Marketing loan benefits are essentially unlimited because producers can
use commodity certificates without limit when other marketing loan options are limited.
One way to double the limit is the “three entity rule,” allowing one person to receive
payments on up to three entities, with second and third entities eligible for one-half of the
limits. The other is the “spouse rule,” allowing a husband and wife to be treated as
separate persons to double a farm’s payment limit. Although payments for most
qualifying commodities are combined toward a single limit, separate limits apply to
peanuts, wool, mohair and honey.3
The 2002 farm bill also created an income test, prohibiting payments to entities with
adjusted gross income greater than $2.5 million, unless 75% or more comes from farming.
Table 1. Payment Limits on Farm Commodity Programs
Current law
Proposals
2002
S. 385
Administration
Farm Bill
H.R. 1590
2006 proposal
Direct and Counter-Cyclical Payments
(a) Direct Payments
$40,000
$20,000
60,000
(b) Counter-Cyclical Payments
$65,000
$30,000
90,000
Doubling allowance
$105,000
$50,000
None
Subtotal
$210,000
$100,000
150,000
(c) Marketing Loan Payments
(c1) Marketing Loan Gains plus (c2)
$75,000
Loan Deficiency Payments
$75,000
100,000
(c3) Commodity Certificates **
No limit
(c4) Loan Forfeiture Gains
Doubling allowance
$75,000
$75,000
None
Subtotal of (c1) and (c2)
$150,000
$150,000
100,000
Subtotal including (c3) and (c4)
No limit
Sum of Direct, Counter-Cyclical, and Marketing Loan Payments
Total of (a), (b), (c1) and (c2)
$360,000
$250,000
250,000
Total including (c3) and (c4)
No limit
Source: CRS.
How Many Acres Does It Take to Reach the Limit? For cotton and rice,
government payments per acre generally are higher, resulting in fewer acres needed to
reach the limit. Data from the USDA Payment Limits Commission show that cotton and
3 See also the USDA fact sheet [http://www.fsa.usda.gov/pas/publications/facts/payelig03.pdf].

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rice farms can reach the limits with half or fewer of the number of acres than corn, wheat,
or soybean farms (Table 2). Moreover, cotton and rice farms usually are larger, further
increasing the likelihood that they reach the limits. In 2002, 14% of farms harvesting
cotton had more than 1,000 acres of cotton, compared with only 2.6% of farms harvesting
more than 1,000 acres of corn. Although data in the table do not account for diversified
farms growing multiple crops, the results reflect general differences between crops.4
How Do Variable Costs Compare? Variable costs per acre to grow cotton and
rice usually exceed the variable costs of growing other crops. Cotton and rice groups cite
higher variable costs to justify higher government payments per acre. USDA data in
Table 2 show that the ratio of government commodity support divided by variable costs
is 164% and 186% for cotton and rice, respectively, compared with 193%, 218% and
259% for corn, wheat, and soybeans, respectively.
Table 2. Acres Needed to Reach Payment Limits, and Support
Relative to Variable Costs
Acres to reach
Acres to reach
Farms with
Total support
$40,000 direct
$65,000 counter-
1,000 acres or
divided by
Crop
payment limit
cyclical limit
more of crop
variable cost
Corn
1,636
1,497
2.6%
193%
Wheat
2,623
2,956
6.4%
218%
Soybeans
3,565
5,852
3.3%
259%
Upland cotton
1,176
891
14.0%
164%
Rice
416
823
7.8%
186%
Source: USDA Payment Limits Commission (Tables 4.3-4.5), and 2002 Census of Agriculture
Policy Issues In Congress
Supporters of payment limits use both economic and political arguments to justify
tighter limits. 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
tighter limits would reduce incentives to expand farms, 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 farm 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.
4 For more analysis, see also Farm Level Projections of the Impacts of Payment Limitations,
Agricultural and Food Policy Center (Texas A&M), June 2003, at [http://www.afpc.tamu.edu/
pubs/3/402/bp-2003-02.pdf]; and Analysis of Stricter Payment Limitations, Food and Agriculture
Policy Research Institute (University of Missouri), June 2003, at [http://www.fapri.missouri.edu/
outreach/publications/2003/FAPRI_UMC_Report_05_03.pdf].

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In August 2003, the Payment Limits Commission (created by the 2002 farm bill)
provided a detailed report to Congress. The commission was charged to study impacts
from tighter limits. The report has extensive data on program payments and limits, but
the Commission ultimately did not take a position other than that any changes should wait
until the next farm bill.
S. 385 and H.R. 1590. In the 109th Congress, Senator Grassley introduced S. 385
to tighten limits on direct, counter-cyclical, and marketing loan payments to a total of
$250,000, and count commodity certificates and loan forfeiture toward marketing loan
limits. The bill has 8 cosponsors. An identical bill, H.R. 1590, was introduced in the
House by Representative Kind and has 2 cosponsors.
The statutory limit (before doubling) on direct payments would decrease from
$40,000 to $20,000; and the limit on counter-cyclical payments would decrease from
$65,000 to $30,000. While the limit on marketing loans would remain the same at
$75,000, the effective limit is reduced because commodity certificates and loan forfeiture
would be counted toward the limit (Table 1). This is a key feature because, as a practical
matter, marketing loan payments are not limited under the 2002 farm bill. When MLGs
and LDPs hit the limit, producers can shift to commodity certificates without limit.
The bills 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, farmers would have another
means and find it easier to double the payment limits.
The changes would apply to the “covered commodities” and certain loan
commodities as a group (wheat, corn, grain sorghum, barley, oats, upland cotton, rice,
soybeans, other oilseeds, extra long staple cotton, dry peas, lentils, and chickpeas). But
peanuts, wool, mohair, and honey are not addressed by the bills, and thus would remain
eligible for the higher limits enacted in the 2002 farm bill, including unlimited use of
commodity certificates and forfeiture.
In February 2005, CBO estimated that a similar plan (but without the provision in
S. 385 allowing single farming operations to double the limit, below) would save $97
million in FY2006 and $1.2 billion over five years.5 CBO has not released a specific
score of S. 385, but the savings can be expected to be lower than the figures above
because of the single farming operation provision.
Proposals in the 107th and 108th Congress. In 2003, Senator Grassley
introduced a similar bill, S. 667 (108th Congress). In 2002, the Senate-passed version of
the 2002 farm bill contained tighter limits (S.Amdt. 2826 to S. 1731, 107th Congress), but
those limits were rejected by the conference committee. That bill would have limited
direct and counter-cyclical payments to a combined $75,000, allowed a $50,000 spouse
benefit, replaced the three-entity rule with direct attribution, limited marketing loan
benefits to $150,000, and counted commodity certificates and forfeiture. The vote on the
Senate’s 2002 farm bill amendment was 66-31 in favor of tighter limits.
5 Congressional Budget Office, Budget Options, “350-02 Mandatory,” Feb. 2005, [http://
www.cbo.gov/showdoc.cfm?index=6075&sequence=0].

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Administration Proposals and Budget Reconciliation. The Administration
re-introduced a proposal for tighter payment limits in its FY2007 budget request in
February 2006, the same payment limits proposal as in the FY2006 budget request. The
Administration estimates savings of $200 million in FY2007 and $845 million over five
years from its payment limits plan.6 The proposal sets a combined cap of $250,000,
includes commodity certificates and loan forfeiture under the limits, eliminates the three-
entity rule, and applies the limits to the dairy program (Table 1).
Both the House and Senate agriculture committees stated in their 2006 views and
estimates letter to the budget committees that the 2002 farm bill should not be reopened,
and that any changes should wait until the next farm bill.7 The House and Senate did not
agree on budget reconciliation for the FY2007 budget, thus eliminating another venue for
payment limits to be discussed this year.
When the Administration proposed similar cuts a year ago and Congress proceeded
with budget reconciliation for FY2006, neither the House nor Senate agriculture
committee included payment limits in their reconciliation mark-up.8 A floor amendment
by Senator Grassley to add payment limits to the Senate version of the FY2006 budget
reconciliation bill failed by a procedural vote of 46-53 on November 3, 2005 (S.Amdt.
2359 to S. 1932). S.Amdt. 2359 contained the same monetary limits as S. 385, but had
different provisions regarding attribution and eligibility.
Non-Binding Budget Amendments on Payment Limits. In 2005, the
Senate-passed budget resolution for FY2006 (S.Con.Res. 18) contained a non-binding
sense of the Senate amendment by Senator Grassley that any agricultural savings should
be achieved primarily through reductions in farm commodity program payment limits.
This provision was deleted in conference.
For the FY2005 budget resolution (S.Con.Res. 95, 108th Congress), Senator Grassley
added an amendment by a 16-6 vote to reduce mandatory agriculture spending by $1.2
billion and increase mandatory conservation, rural development, and child nutrition
spending by the same amount. A similar amendment was added to the FY2004 Senate
budget resolution (S.Con.Res. 23, 108th Congress). The amendments mentioned in this
paragraph did not contain specific reconciliation instructions and would have been
nonbinding on the Agriculture Committee.
6 Office of Management and Budget, Major Savings and Reforms in the President’s 2007 Budget,
February 2006, pp. 167-170, [http://www.whitehouse.gov/omb/budget/fy2007/pdf/savings.pdf].
7 House Committee on Agriculture, “Budget Views and Estimates Letter,” February 21, 2006
[http://agriculture.house.gov/press/109/BudgetLetterSigned.pdf]. Senate Committee on
Agriculture, Nutrition, and Forestry, “Budget Views and Estimates Letter,” March 2, 2006
[http://agriculture.senate.gov/07budgltr.pdf].
8 For more on budget reconciliation and the Deficit Reduction Act of 2005 (P.L. 109-171), see
CRS Report RS22086, Agriculture and FY2006 Budget Reconciliation, by Ralph M. Chite.

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