Farm Commodity Payment Limits: Comparison of Proposals

Farm Commodity Payment Limits: Comparison of Proposals

Order Code RS21138
Updated April 26, 2002
CRS Report for Congress
Received through the CRS Web
Farm Commodity Payment Limits:
Comparison of Proposals
Jasper Womach
Agriculture Policy Specialist
Resources, Science, and Industry Division
Summary
Greater public awareness of the size of commodity program payments reaching a
comparatively small number of very large farms has focused the attention of Congress
on payment limits. Limits on commodity program payments have been imposed since
1970. As part of the emergency economic assistance packages enacted each of the past
three years, the payment limits have been doubled. In addition, a mechanism has been
developed that allows farms to circumvent the limit on loan deficiency payments, namely
commodity certificates.
The House farm bill (H.R. 2646) largely preserves payment limits at the increased
levels recently approved, including the exemption of commodity certificates. In contrast,
the bill adopted by the Senate (S. 1731), including an amendment sponsored by Senators
Dorgan and Grassley, reduces the limits about 50% and eliminates the commodity
certificate exemption. Translating the dollar limits into crop acreage levels makes it
easier to see how farmers might be impacted. Lower payment limits mostly are felt by
rice and cotton farmers.
A limit on the total annual payments a “person” can receive through farm commodity
support programs was first enacted in the Agricultural Act of 1970 and has remained in
place since. Fundamentally, the need for payment limits and the level at which they should
be set is a debate about farm size, and not about the financial condition of recipients. In
no case does a farm have to demonstrate financial hardship to be eligible for commodity
program payments. In the House and Senate farm bills (as in current law) fixed, decoupled
payments and counter-cyclical payments are based on each farm’s production history, not
current production, of wheat, corn, grain sorghum, barley, oats, rice, upland cotton,
soybeans and minor oilseeds. These are called “covered crops” in the House bill and
“contract commodities” in the Senate bill. Also, the identical support system is newly
applicable to peanuts in both bills. Farms actually producing these same commodities are
eligible for marketing loans based solely on current production. As market prices decline
below loan rates, marketing loan benefits increase. In all cases, subsidy payments are
made per unit of a commodity (i.e., $ per bushel).
Congressional Research Service ˜ The Library of Congress

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When Congress imposes payment limits, it is saying that not all production on large
farms will be subsidized. Supporters of payment limits argue that the federal government
should not directly finance the consolidation of farms into larger and larger operations
through commodity support programs. Critics of payment limits counter that all farms are
in equal need of support when market prices decline, and larger farms should not be
penalized for the economies of size they have achieved.
Under the Agricultural Market Transition Act (AMTA) of 1996, payments to
producers of contract commodities include: 1) fixed, decoupled payments (called
production flexibility contract payments (PFCs)); 2) loan deficiency payments(LDPs); 3)
and marketing loan gains (MLGs). In the law, the annual limit on PFC payments is
$40,000 per person. Emergency market loss payments in 2000 and 2001 matched the PFC
payments, effectively doubling that limit. Together, the combination of LDPs and MLGs,
called marketing loan benefits, is counted against a single payment limit of $75,000.
However, this limit was doubled to $150,000 for crop years 1999, 2000, and 2001.
The payment limits in the House bill (H.R. 2646) are higher than current law. In
contrast, the Senate bill (S. 1731, including the Dorgan/Grassley-sponsored payment limit
provisions) substantially reduces the maximum payment a farmer can receive. Table 1
shows current law and the two payment limit proposals. The House bill sets separate
limits on fixed, decoupled payments ($50,000) and on counter-cyclical payments
($75,000). The Senate bill combines fixed, decoupled payments and counter-cyclical
payments under a single payment limit ($75,000).
Table 1. Commodity Program Payment Limit Provisions of Current
Law and Proposed Alternatives
Current Law,
H.R. 2646
S. 1731
Including
Emergency
Assistance
Fixed, Decoupled Payments
$80,000
$50,000
na
Counter-Cyclical Payments
na
$75,000
na
Sum of Fixed, Decoupled Payments and
$80,000
$125,000
$75,000
Counter-Cyclical Payments
Marketing Loan Gains and Loan Deficiency
$150,000
$150,000
$150,000
Payments (Marketing Loan Benefits)
Three Entity Rule / Spouse Allowance
$230,000
$275,000
$50,000
Sum of Above Items
$460,000
$550,000
$275,000
Commodity Certificates
No Limit
No Limit
Counted As
Marketing Loan
Benefit
Loan Forfeiture Gains
No Limit
No Limit
Counted As
Marketing Loan
Benefit
Overall Limit on Direct Payments and Loan
Forfeitures
None
None
$275,000
While current law and the House bill set explicit limits on marketing loan gains and
LDPs, the use of “commodity certificates” and forfeiture of loan collateral makes it

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possible for farmers to circumvent the limits. So, as a practical matter , marketing loans
benefits are not limited. However, the Senate bill applies all gains from the use of
commodity certificates as well as all gains from forfeiture of loan collateral toward the
$150,000 limit on marketing loan payments.
Under current law, farmers can double the payment limit by using the “husband &
wife rule” or by using the “three entity rule” – but not both. 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. The three
entity rule provides that one person is eligible for payments on up to three farm entities.
The payment limit on each of the second and third farms is half the amount on the first
farm. Therefore, the limit doubles if an individual receives payments on three farms
instead of one farm. The House bill preserves current law on spouses and the three entity
rule. The Senate bill eliminates the three entity rule, replacing it with direct attribution of
payments to the individual from any and all farms, and sets the additional spouse benefit
at $50,000.
Since payments are related to production and therefore size, just how large can a farm
be before it reaches the payment limits? The following table helps to answer that question,
but in a simplified and hypothetical way. First, the analysis assumes that a farm produces
a single commodity. In fact, all farms receiving fixed, decoupled payments and counter-
cyclical payments are free to plant any crop or combination of crops except fruits and
vegetables on the payment acres. These planting flexibility rules in the current law are
preserved in the House and Senate bills. For example, a farm that receives fixed,
decoupled and counter-cyclical cotton payments might produce peanuts and soybeans and
corn and receive payments on these crops. Second, the analysis uses national average
yields, while actual payments are based on each farm’s own yield experience. Finally, the
analysis in Table 2 does not attempt to determine how many acres are needed to reach the
payment limit for marketing loan benefits. Rather, it calculates how low the price of a
commodity would have to go for a farm that reaches the limit on fixed, decoupled and
counter-cyclical payments also to reach the limit on marketing loan benefits. The price
calculation is for an expanded operation, which means it assumes the greater payment limit
for the spouse or 3-entity situation.
Table 2 below, for example, shows that the H.R. 2646 limit, of $125,000 for fixed,
decoupled payments and counter-cyclical payments, would be reached at 3,217 wheat
payment acres. The same farm could have 6,434 wheat payment acres before reaching the
payment limit under the husband and wife rule or if it were divided into three entities. For
a 6,434 acre wheat farm to reach the $150,000 limit on marketing loan benefits, the posted
county price would have to drop to $2.03 per bushel or lower. However, under the House
bill, as under current law, a farmer reaching the $150,000 limit on marketing loan benefits
can purchase marketing certificates at the posted county price with which to pay off
nonrecourse commodity loans without limit. In contrast, the Senate bill counts commodity
certificate gains, as well as loan forfeiture gains, against the limit.
Peanuts require special mention. In the House bill, the payment limits on peanuts are
separate from the limits that apply to the collection of “covered crops.” In the Senate bill,
the limits apply to all crops combined, which means grains, oilseeds, cotton, and peanuts.
This is an important difference, as some peanut producers also grow sizable cotton crops.

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Under the House bill the potential payments to a peanut/cotton farm are twice as high as
under the Senate bill.
Table 2. Comparison of Payment Limit Proposals, by Commodity
H.R. 2646
S. 1731
Wheat
Fixed, Decoupled and Counter-Cyclical Payment Acres Limit
Acres to Reach Individual Limit (1 person, 1 entity)
3,217
3,876
Acres to Reach Expanded Limit (Spouse, or 3 entities)
6,434
6,461
PCP to Reach Marketing Loan Benefit Limit ($/bu)
$2.03
$2.45
Corn
Fixed, Decoupled and Counter-Cyclical Payment Acres Limit
Acres to Reach Individual Limit (1 person, 1 entity)
1,911
1,981
Acres to Reach Expanded Limit (Spouse, or 3 entities)
3,822
3,303
PCP to Reach Marketing Loan Benefit Limit ($/bu)
$1.61
$1.76
Cotton
Fixed, Decoupled and Counter-Cyclical Payment Acres Limit
Acres to Reach Individual Limit (1 person, 1 entity)
1,470
881
Acres to Reach Expanded Limit (Spouse, or 3 entities)
2,940
1,468
AWP to Reach Marketing Loan Benefit Limit ($/lb)
$0.4411
$0.2892
Rice
Fixed, Decoupled and Counter-Cyclical Payment Acres Limit
Acres to Reach Individual Limit (1 person, 1 entity)
930
487
Acres to Reach Expanded Limit (Spouse, or 3 entities)
1,860
812
AWP to Reach Marketing Loan Benefit Limit ($/cwt)
$5.19
$3.84
Soybeans
Fixed, Decoupled and Counter-Cyclical Payment Acres Limit
Acres to Reach Individual Limit (1 person, 1 entity)
5,656
3,384
Acres to Reach Expanded Limit (Spouse, or 3 entities)
11,312
5,641
PCP to Reach Marketing Loan Benefit Limit ($/bu)
$4.60
$4.55
Peanuts
Fixed, Decoupled and Counter-Cyclical Payment Acres Limit
Acres to Reach Individual Limit (1 person, 1 entity)
1,206
543
Acres to Reach Expanded Limit (Spouse, or 3 entities)
2,412
905
AWP to Reach Marketing Loan Benefit Limit ($/lb)
$0.15
$0.14
Primary data for calculations are in Tables 4 at the end of this report.

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Another indicator of how a $150,000 the limit on marketing loan benefits relates to
farm size can be developed from past prices and loan rates as shown in Table 3. In the case
of rice, for example, the December 2000 average price received by farmers was $5.60 per
hundredweight (cwt) compared to the national loan rate of $6.50 per cwt. If this
difference of $0.90 were received as an LDP on a farm with a yield of 62.81 cwt per acre
(6,281 pounds), it would take 2,654 acres to reach $150,000. However, the November
2001 average price received by farmers was $4.08 per hundredweight (cwt) compared to
the national loan rate of $6.50 per cwt. With an LDP of $2.42 per cwt., an average
yielding farm would reach the LDP limit with 988 acres.
Table 3. Acres Needed to Receive $150,000 in LDP Benefits Based
on Average Harvest Period Prices
Commodity
Average
Marketing Season Avg
Harvest
Hypothetical Production Acres
Crop Year
Yield
Loan Rate
Price
Period Price
LDP
To Reach LDPs
Payment
of $150,000
Units/Acre
$/Unit
$/Unit
$/Unit
$/Unit
Acres
Wheat (bu)
2001/02
40.4
$2.58
$2.80
$2.63
-$0.05
na
2000/01
41.9
$2.58
$2.62
$2.32
$0.26
13,769
1999/00
42.7
$2.58
$2.48
$2.22
$0.36
9,758
1998/99
43.2
$2.58
$2.65
$2.38
$0.20
17,361
Corn (bu)
2001/02
133.5
$1.89
$1.90
$1.84
$0.05
22,472
2000/01
137.1
$1.89
$1.85
$1.61
$0.28
3,907
1999/00
133.8
$1.89
$1.82
$1.69
$0.20
5,605
1998/99
134.4
$1.89
$1.94
$1.84
$0.05
22,321
Sorghum (bu)
2001/02
61.2
$1.71
$1.85
$1.83
-$0.12
na
2000/01
60.9
$1.71
$1.89
$1.55
$0.16
15,394
1999/00
69.7
$1.74
$1.57
$1.40
$0.34
6,330
1998/99
67.3
$1.74
$1.66
$1.60
$0.14
15,920
Cotton (bu)
2001/02
679
$0.5192
$0.3140
$0.2950
$0.22
985
2000/01
632
$0.5192
$0.4980
$0.5030
$0.02
14,651
1999/00
607
$0.5192
$0.4500
$0.4280
$0.09
2,710
1998/99
625
$0.5192
$0.6020
$0.5810
-$0.06
na
Rice (cwt)
2001/02
62.72
$6.50
$4.20
$4.08
$2.42
988
2000/01
62.81
$6.50
$5.61
$5.60
$0.90
2,654
1999/00
58.66
$6.50
$5.93
$5.78
$0.72
3,552
1998/99
56.63
$6.50
$8.89
$9.02
-$2.52
na
Soybeans (bu)
2001/02
38.2
$5.26
$4.25
$4.09
$1.17
3,356
2000/01
38.1
$5.26
$4.54
$4.45
$0.81
4,861
1999/00
36.6
$5.26
$4.63
$4.43
$0.83
4,938
1998/99
38.9
$5.26
$4.93
$5.18
$0.08
48,201
Prices and yield are from USDA, World Agricultural Supply and Demand Estimates, April 10, 2002, and
previous issues. Season average prices for 2001/02 are mid-points of forecast price ranges published in USDA,
World Agricultural Supply and Demand Estimates, April 10, 2002

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Table 4. Calculation of Acreage Related to Payment Limits in H.R. 2646 and S. 1731
H.R. 2646, Analysis of Payment Limit Provisions
Wheat(bu)
Corn(bu) Sorghum(bu)
Barley(bu)
Cotton(lb)
Rice(cwt) Soybeans(bu)
Peanuts(lb)
Commodity Support Levels and Maximum Payment Rates
Target Price
$4.04
$2.78
$2.64
$2.39
$0.7360
$10.82
$5.86
$0.24
Loan Rate
$2.58
$1.89
$1.89
$1.65
$0.5192
$6.50
$4.92
$0.175
Fixed, Decoupled Payment Rate (max. at 85%)
$0.45
$0.26
$0.31
$0.21
$.0567
$2.00
$0.36
$0.015
Counter-Cyclical Payment Rate (max. at 85%)
$0.79
$0.50
$0.33
$0.42
$0.1276
$1.67
$0.44
$0.40
Acres to Reach $125,000 Fixed, Decoupled and Counter-Cyclical Payment Limit
Bu, cwt, lb to Reach $50,000 Limit
110,988
196,078
163,399
235,294
881,912
25,031
140,056
3267974
Bu, cwt,lb to Reach $75,000 Limit
94,877
149,551
226,244
180,072
587,843
44,789
169,683
1877347
Average Program Payment Yield*
34.5
102.6
56.9
46.7
600
48.2
30.0
2710
Acres to Reach Fixed Limit of $50,000
3,217
1,911
2,872
5,038
1,470
520
4,669
1,206
Acres to Reach Counter-Cyclical Limit of $75,000
2,750
1,458
3,976
3,856
980
930
5,656
693
Acres to Reach $125,000 Limit (1 entity)
3,217
1,911
3,976
5,038
1,470
930
5,656
1,206
Acres to Reach $250,000 Limit (3 entities)
6,434
3,822
7,952
10,077
2,940
1,860
11,312
2,412
Implied Posted County Price to Reach Marketing Loan Gain of $150,000 on Farms Comprised of 3 Entities (larger farms)
Yield/Harvested Acre**
42.1
141.9
69.2
64.0
653
61.36
41.0
2,680
Loan Rate
$2.58
$1.89
$1.89
$1.65
$0.5192
$6.50
$4.92
$0.175
Marketing Loan Benefit to Reach $150,000
$0.55
$0.28
$0.27
$0.23
$0.08
$1.31
$0.32
$0.02
Implied PCP or AWP
$2.03
$1.61
$1.62
$1.42
$0.4441
$5.19
$4.60
$0.15
S. 1731, Analysis of Payment Limit Provisions
Wheat(bu)
Corn(bu) Sorghum(bu)
Barley(bu)
Cotton(lb)
Rice(cwt) Soybeans(bu)
Peanuts(lb)
Commodity Support Levels and Maximum Payment Rates
Target Price
$3.446
$2.3472
$2.3472
$2.1973
$0.6739
$9.2914
$5.7431
$0.26
Loan Rate
$2.996
$2.0772
$2.0772
$1.9973
$0.5493
$6.4914
$5.1931
$0.20
Direct and Counter-Cyclical Payments (max.)
$0.4500
$0.2700
$0.2700
$0.2000
$0.1246
$2.8000
$0.5500
$0.051
Acres to Reach $75,000 Fixed, Decoupled and Counter-Cyclical Payment Limit
Bu, cwt, lb to Reach Limit
166,667
277,778
277,778
375,000
576,923
26,786
136,364
1,470,588
Average Program Payment Yield*
43.0
140.2
67.8
54.7
655
55.0
40.3
2,170
Acres to Reach $75,000 Limit (one person)
3,876
1,981
4,097
6,856
881
487
3,384
543
Acres to Reach $125,000 Limit (spouse allowance)
6,461
3,303
6,830
11,428
1,468
812
5,641
905
Implied Posted County Price to Reach Marketing Loan Gain of $150,000 on Farms with Spouse Allowance (larger farms)
Yield/Harvested Acre**
42.1
141.9
69.2
64.0
653
61.36
41.0
2,680
Loan Rate
$3.00
$2.08
$2.08
$2.00
$0.5500
$6.85
$5.20
$0.20
Marketing Loan Benefit Rate to Reach $150,000
$0.55
$0.32
$0.32
$0.21
$0.15
$3.01
$0.65
$0.07
Implied PCP or AWP
$2.45
$1.76
$1.76
$1.79
$0.40
$3.84
$4.55
$0.14