Farm Commodity Payment Limits: Comparison of Proposals

This report discusses U.S. policy regard farm commodities. 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

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 CRS-2 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 H.R. 2646 Current Law, Including Emergency Assistance Fixed, Decoupled Payments S. 1731 $80,000 $50,000 na na $75,000 na $80,000 $125,000 $75,000 Marketing Loan Gains and Loan Deficiency Payments (Marketing Loan Benefits) $150,000 $150,000 $150,000 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 None None $275,000 Counter-Cyclical Payments Sum of Fixed, Decoupled Payments and Counter-Cyclical Payments Overall Limit on Direct Payments and Loan Forfeitures 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 CRS-3 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 countercyclical 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 $150,000 limit on marketing loan benefits can purchase marketing certificates at the posted county price with which to pay off nonrecourse commodity loans without limit. In contrast, the Senate bill counts commodity certificate gains, as well as loan forfeiture gains, against the limit. Peanuts require special mention. In the House bill, the payment limits on peanuts are separate from the limits that apply to the collection of “covered crops.” In the Senate bill, the limits apply to all crops combined, which means grains, oilseeds, cotton, and peanuts. This is an important difference, as some peanut producers also grow sizable cotton crops. CRS-4 Under the House bill the potential payments to a peanut/cotton farm are twice as high as under the Senate bill. Table 2. Comparison of Payment Limit Proposals, by Commodity Wheat Fixed, Decoupled and Counter-Cyclical Payment Acres Limit Acres to Reach Individual Limit (1 person, 1 entity) Acres to Reach Expanded Limit (Spouse, or 3 entities) PCP to Reach Marketing Loan Benefit Limit ($/bu) Corn Fixed, Decoupled and Counter-Cyclical Payment Acres Limit Acres to Reach Individual Limit (1 person, 1 entity) Acres to Reach Expanded Limit (Spouse, or 3 entities) PCP to Reach Marketing Loan Benefit Limit ($/bu) Cotton Fixed, Decoupled and Counter-Cyclical Payment Acres Limit Acres to Reach Individual Limit (1 person, 1 entity) Acres to Reach Expanded Limit (Spouse, or 3 entities) AWP to Reach Marketing Loan Benefit Limit ($/lb) Rice Fixed, Decoupled and Counter-Cyclical Payment Acres Limit Acres to Reach Individual Limit (1 person, 1 entity) Acres to Reach Expanded Limit (Spouse, or 3 entities) AWP to Reach Marketing Loan Benefit Limit ($/cwt) Soybeans Fixed, Decoupled and Counter-Cyclical Payment Acres Limit Acres to Reach Individual Limit (1 person, 1 entity) Acres to Reach Expanded Limit (Spouse, or 3 entities) PCP to Reach Marketing Loan Benefit Limit ($/bu) Peanuts Fixed, Decoupled and Counter-Cyclical Payment Acres Limit Acres to Reach Individual Limit (1 person, 1 entity) Acres to Reach Expanded Limit (Spouse, or 3 entities) AWP to Reach Marketing Loan Benefit Limit ($/lb) H.R. 2646 S. 1731 3,217 6,434 $2.03 3,876 6,461 $2.45 1,911 3,822 $1.61 1,981 3,303 $1.76 1,470 2,940 $0.4411 881 1,468 $0.2892 930 1,860 $5.19 487 812 $3.84 5,656 11,312 $4.60 3,384 5,641 $4.55 1,206 2,412 $0.15 543 905 $0.14 Primary data for calculations are in Tables 4 at the end of this report. CRS-5 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 Crop Year Average Yield Units/Acre Wheat (bu) 2001/02 2000/01 1999/00 1998/99 Corn (bu) 2001/02 2000/01 1999/00 1998/99 Sorghum (bu) 2001/02 2000/01 1999/00 1998/99 Cotton (bu) 2001/02 2000/01 1999/00 1998/99 Rice (cwt) 2001/02 2000/01 1999/00 1998/99 Soybeans (bu) 2001/02 2000/01 1999/00 1998/99 Marketing Season Avg Harvest Hypothetical Production Acres Loan Rate Price Period Price LDP To Reach LDPs Payment of $150,000 $/Unit $/Unit $/Unit $/Unit Acres 40.4 41.9 42.7 43.2 $2.58 $2.58 $2.58 $2.58 $2.80 $2.62 $2.48 $2.65 $2.63 $2.32 $2.22 $2.38 -$0.05 $0.26 $0.36 $0.20 na 13,769 9,758 17,361 133.5 137.1 133.8 134.4 $1.89 $1.89 $1.89 $1.89 $1.90 $1.85 $1.82 $1.94 $1.84 $1.61 $1.69 $1.84 $0.05 $0.28 $0.20 $0.05 22,472 3,907 5,605 22,321 61.2 60.9 69.7 67.3 $1.71 $1.71 $1.74 $1.74 $1.85 $1.89 $1.57 $1.66 $1.83 $1.55 $1.40 $1.60 -$0.12 $0.16 $0.34 $0.14 na 15,394 6,330 15,920 679 632 607 625 $0.5192 $0.5192 $0.5192 $0.5192 $0.3140 $0.4980 $0.4500 $0.6020 $0.2950 $0.5030 $0.4280 $0.5810 $0.22 $0.02 $0.09 -$0.06 985 14,651 2,710 na 62.72 62.81 58.66 56.63 $6.50 $6.50 $6.50 $6.50 $4.20 $5.61 $5.93 $8.89 $4.08 $5.60 $5.78 $9.02 $2.42 $0.90 $0.72 -$2.52 988 2,654 3,552 na 38.2 38.1 36.6 38.9 $5.26 $5.26 $5.26 $5.26 $4.25 $4.54 $4.63 $4.93 $4.09 $4.45 $4.43 $5.18 $1.17 $0.81 $0.83 $0.08 3,356 4,861 4,938 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 CRS-6 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) Commodity Support Levels and Maximum Payment Rates Target Price $4.04 $2.78 $2.64 $2.39 Loan Rate $2.58 $1.89 $1.89 $1.65 Fixed, Decoupled Payment Rate (max. at 85%) $0.45 $0.26 $0.31 $0.21 Counter-Cyclical Payment Rate (max. at 85%) $0.79 $0.50 $0.33 $0.42 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 Bu, cwt,lb to Reach $75,000 Limit 94,877 149,551 226,244 180,072 Average Program Payment Yield* 34.5 102.6 56.9 46.7 Acres to Reach Fixed Limit of $50,000 3,217 1,911 2,872 5,038 Acres to Reach Counter-Cyclical Limit of $75,000 2,750 1,458 3,976 3,856 Acres to Reach $125,000 Limit (1 entity) 3,217 1,911 3,976 5,038 Acres to Reach $250,000 Limit (3 entities) 6,434 3,822 7,952 10,077 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 Loan Rate $2.58 $1.89 $1.89 $1.65 Marketing Loan Benefit to Reach $150,000 $0.55 $0.28 $0.27 $0.23 Implied PCP or AWP $2.03 $1.61 $1.62 $1.42 S. 1731, Analysis of Payment Limit Provisions Wheat(bu) Corn(bu) Sorghum(bu) Barley(bu) Commodity Support Levels and Maximum Payment Rates Target Price $3.446 $2.3472 $2.3472 $2.1973 Loan Rate $2.996 $2.0772 $2.0772 $1.9973 Direct and Counter-Cyclical Payments (max.) $0.4500 $0.2700 $0.2700 $0.2000 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 Average Program Payment Yield* 43.0 140.2 67.8 54.7 Acres to Reach $75,000 Limit (one person) 3,876 1,981 4,097 6,856 Acres to Reach $125,000 Limit (spouse allowance) 6,461 3,303 6,830 11,428 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 Loan Rate $3.00 $2.08 $2.08 $2.00 Marketing Loan Benefit Rate to Reach $150,000 $0.55 $0.32 $0.32 $0.21 Implied PCP or AWP $2.45 $1.76 $1.76 $1.79 Cotton(lb) Rice(cwt) Soybeans(bu) Peanuts(lb) $0.7360 $0.5192 $.0567 $0.1276 $10.82 $6.50 $2.00 $1.67 $5.86 $4.92 $0.36 $0.44 $0.24 $0.175 $0.015 $0.40 881,912 587,843 600 1,470 980 1,470 2,940 25,031 44,789 48.2 520 930 930 1,860 140,056 169,683 30.0 4,669 5,656 5,656 11,312 3267974 1877347 2710 1,206 693 1,206 2,412 653 $0.5192 $0.08 $0.4441 61.36 $6.50 $1.31 $5.19 41.0 $4.92 $0.32 $4.60 2,680 $0.175 $0.02 $0.15 Rice(cwt) Soybeans(bu) Peanuts(lb) Cotton(lb) $0.6739 $0.5493 $0.1246 $9.2914 $6.4914 $2.8000 $5.7431 $5.1931 $0.5500 $0.26 $0.20 $0.051 576,923 655 881 1,468 26,786 55.0 487 812 136,364 40.3 3,384 5,641 1,470,588 2,170 543 905 653 $0.5500 $0.15 $0.40 61.36 $6.85 $3.01 $3.84 41.0 $5.20 $0.65 $4.55 2,680 $0.20 $0.07 $0.14