Report of the Payment Limit Commission Keith Collins

1. Report of the Payment Limit Commission Keith Collins

2. 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

3. 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.”

4. 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)

5. 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

6. 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

7. 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

8. 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 DirectCCMLG/LDP Dollars Own farm 40,000 65,000 75,000 A 20,000 32,500 37,500 B 20,00032,50037,500 Total 80,000 130,000 150,000 Grand total $360,000

9. 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 personalmanagement • Contributions must be commensurate with shares and must be at risk

10. Distribution of PFC Payments, 2001$4.1 bil. Paid to 1.2 mil. Payees

11. Certificate Exchange Gains by State, 2001

12. Distribution of Certificate Exchange Gains, 2001

13. Farms Receiving Government Payments34% of all Farms in 2001

14. Average Payments by Farm Type, 2001 Farm typePayments 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.

15. 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

16. Effect of Current Limits on Payments PFC Mkt loss Amount not paid out due to limits Loan benefits

17. Payment Reductions due to Current Limits in 2001, by Crop Crop % Reduction Corn 0.6 Wheat 0.6 Cotton 2.5 Rice 1.1

18. Base Acres Needed to Reach $40K in Direct Payments

19. Number of Persons per FSA Farm Persons 1-23-56-1011-2021+ FSA Farms1.6 mil. 198,890 19,222 2,289 325

20. Marketing Assistance Loan Benefits

21. 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

22. 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

23. Regional Effects of Further Limitations

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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