Report of the Payment Limit Commission Keith Collins.
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Report of the Payment Limit Commission
Keith Collins
Commission’s Statutory Charge
• 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
Commission’s Other Charge
Report language:
“Examine the feasibility of improving the application and effectiveness of payment limitation requirements, including the use of commodity certificates and the unlimited forfeiture of loan collateral.”
Commission Members
• 3 Members Appointed by House Agriculture Committee
--Gary Black (Georgia); Gary Dyer (Arizona);
Richard Newman (Texas)
• 3 Members Appointed by the Senate Agriculture Committee
--Terry Ferguson (Illinois); Ellen Linderman (North Dakota);
Neil Harl (Iowa)
• 3 Members Appointed by the Secretary
--Alice Devine (Kansas); William Spight (Mississippi);
Ed Smith (Texas)
• Keith Collins (Chairman)
Commission Timeline
• Late January 2003: first meeting
• March 2003: Commission solicited public comments
--375 comments received
• June 17, 2003: public workshop held on
--9 invited speakers and several members of the public
provided comments
• August 2003: final meeting held
--From January-August, 9 meetings held in which several experts were invited to provide information
• September 2003: report released
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
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
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
DirectCC MLG/LDPDollars
Own farm 40,000 65,000 75,000A 20,000 32,500 37,500B 20,000 32,500 37,500
Total 80,000 130,000 150,000Grand total $360,000
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 personal management
• Contributions must be commensurate with shares and must be at risk
Distribution of PFC Payments, 2001$4.1 bil. Paid to 1.2 mil. Payees
Payment size % of payees
% of payments
$10,000 or less 91 43
$10-30,000 8 39
$30,000 or more 1 18
Certificate Exchange Gains by State, 2001
State Gains (Mil. $)Arkansas 203
California 189
Georgia 146
Louisiana 113
Mississippi 256
Texas 300
Subtotal 1,207
U.S. total 1,700
Distribution of Certificate Exchange Gains, 2001
Payment size % of payees
% of payments
$50,000 or less 61 12
$50-150,000 25 30
$150,000 or more 14 58
Farms Receiving Government Payments34% of all Farms in 2001
Of farms receiving payments:
Rural residence
farms (273,000)
Intermediate farms(330,000)
Commercial farms(123,000)
Avg. net cash income
2,256 17,961 124,220
Avg. gov. payments
4,827 13,865 60,532
Share of:
Farms 38 45 17
Payments 10 34 56
Production 7 27 66
Average Payments by Farm Type, 2001
Farm type Payments per farm*Cash grain $31,900
Oilseeds $15,800
Rice $116,600
Cotton $55,500
Other crops $12,100
Livestock $9,300
*For farms receiving government payments. About 20% of other crop and 40% of livestock farms received government payments in 2001.
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
Effect of Current Limits on Payments
02468
10
1214161820
2001 2001
Bil
lion
Dol
lars
Amount not paid out due to limits
PFC
Mktloss
Loan benefits
Payment Reductions due to Current Limits in 2001, by Crop
Crop % Reduction
Corn 0.6
Wheat 0.6
Cotton 2.5
Rice 1.1
Base Acres Needed to Reach $40K in Direct Payments
Crop Base acres Comment
Corn 1,636 1.5% farms harvest>1,000 ac.
Wheat 2,623 5.2% farms harvest>1,000 ac.
Soybeans 3,565 1.9% farms harvest>1,000 ac.
Upland cotton 1,176 10.1% farms harvest>1,000 ac.
Rice 416 19.9% farms harvest>500 ac.
Number of Persons per FSA Farm
Persons
1-2 3-5 6-10 11-20 21+
FSA Farms 1.6 mil. 198,890 19,222 2,289 325
Marketing Assistance Loan Benefits
0
1
23
4
5
67
8
9
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Bil
. $
LDPsMLGsCEGsTotal
Certificates
• Used to facilitate marketing loan administration
• Used to avoid loan forfeitures, gain not s.t. limits
• Nonrecourse loan makes LDP/MLG limit ineffective
• Use of certificates with nonrecourse loan has little consequence for taxpayers, slight increase in farm income, and avoids market disruption of forfeitures
Effects of Further Limitations on:1--Farm Income
• Reducing direct limit to $30K, CC to $50K and loan benefit to $75K:
Direct payments fall $255-275 mil.
CC payments fall $400-425 mil.
Loan benefits fall $400-500 mil.• Reductions: 4-5% of payments• Producers affected: rises to 35K from 12K• States most affected: CA, AZ, AR, MS
Regional Effects of Further Limitations
Percent of Producers Having Payments Reduced Under$30,000 Limit on 2000-Crop PFC Payments
Zero
0.1-3 Percent
3 -10 Percent
10-20 Percent
More than 20 Percent
Percent Reduction in Payments Under $30,000 Limit on2000-Crop PFC Payments
Zero
0.1-3 Percent
3-6 Percent
6-10 Percent
More than 10 Percent
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
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
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
Commission Recommendations--1
• General:--Delay change until next farm bill or allow adequate phase-
in time--Increase compliance resources at FSA/OIG--Avoid incentives to create business organizations for
payment purposes--Avoid changes that force risk shifting from landlord to
tenant--Changes should be meaningful, transparent and simple and
sensitive to commodities, regions, existing infrastructure--Information and analysis
Commission Recommendations--2
• “Actively engaged” should be strengthened by combining active labor and management and making it meaningful and measurable
• Direct attribution would improve transparency, administration, efficiency– Attribute payments through entities to individuals
– Entities still qualify for payments but interests must be actively engaged in agriculture
– Landowner/share rent exemption would continue
Commission Recommendations--3
• Commission divided on imposing payment limits on forfeiture and certificate gains
• Key issue is whether to limit nonrecourse loans– Some see loans as fundamental to income stability and risk
management and any limitation would reduce production, efficiency, and rural infrastructure
– Others believe loan benefits should limited to production on family-size operations. They argue such a limit would reduce the income derived from economies of scale, lowering land values and slowing farm consolidation with associated benefits to rural communities
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