March 8, 2005

Sustainable Agriculture Coalition:
A Proposal for Farm Program Payment Limitation Reform

On February 15, 2005, Senators Chuck Grassley (R-IA) and Byron Dorgan (D-ND) introduced the Rural America Preservation Act of 2005 (S. 385) to place limitations on the amount of farm commodity program subsidies any one farm may receive. The newly introduced bill is similar to legislation they introduced in the 108th Congress and an amendment they sponsored during the 2002 Farm Bill debate that gained a two-thirds affirmative vote on the floor of the Senate. The bill is co-sponsored by Senators Chuck Hagel (R-NE), Tim Johnson (D-SD), Sam Brownback (R-KS), and Ben Nelson (D-NE) with additional sponsors expected in coming weeks.

Enactment of effective payment limitation reform will:
• Place a real limit on the amount of money any one entity can receive and close loopholes to distribute scarce federal dollars in a more equitable way.
• Level the playing field for family farms by limiting the ability of mega farms to drive them out of business by bidding land away from them.
• Improve farm income by reducing land price inflation caused when program benefits are bid into land prices.
• Help us comply with WTO standards by reducing incentives to overproduce, which put downward pressure on commodity prices, encourage dumping, damage agricultural development efforts in poorer countries, and harm the environment.
• Produce substantial budget savings which can be used to reinvest in, or reduce budget pressure on, programs providing long-term solutions to the social, economic, and environmental problems of agriculture and rural communities.
• Eliminate current loopholes in law and regulation that invite abuse and compromise the integrity of farm programs, making a mockery of the intent of Congress in enacting payment limitations in the first place.

Key features of the legislation include:
• Lower Limits - The bill would establish effective caps of $40,000 on direct (fixed) payments, $60,000 on counter cyclical payments, and $150,000 on loan deficiency payments and marketing loan gains, including gains on generic certificates and forfeited commodities. The nominal limits would be half these amounts. The combined limit would be $250,000. (In comparison, under current law the cap on direct payments and counter cyclical payments is $80,000 and $130,000, respectively, and there is no effective cap on loan deficiency payments and marketing loan gains, and hence no effective total limitation.)

• Simplification – Qualifying for the maximum legal payment would be greatly simplified. Farmers would not need to reorganize under the “three entity” rule as they do under current law. An individual who participates in just one farming operation could receive double the nominal limit, just like an individual who reorganizes his/her farm under the three entity rule. That would reduce farmers’ legal costs by allowing them to receive the maximum payment without hiring a lawyer to restructure the farm. The spouse equity rule is retained in its entirety. Married couples who qualify under the spouse rule would receive up to twice the nominal payment limitations, as under current law.

• Loophole Closings –The Secretary of Agriculture would be directed to promulgate regulations that count all payments on production under the primary control of a single person toward that person’s limitations, under certain circumstances. This would prevent mega farms from avoiding the limitations by constructing business relationships that allow them to control production but put crop ownership and payments in the name of other parties.

These regulations would come into play only when payments on the production controlled by a person exceed the effective limits established by this Act. They would apply to large farmers who 1) share rent land for more than the usual and customary rate in return for other concessions to shift payments to the land owner, 2) provide custom farming services to family members or entities that have less than an arms length relationship; or 3) have primary control over a joint operation or multiple entities. The bill also provides that if program participants defraud the government, they become ineligible to participate for the next five years.

Rationale for the Act
Effective farm program payment limitations will distribute scarce federal dollars in a more equitable way, help keep more farmers on the land, improve farm income, reduce incentives to overproduce, and help retain budget support for other important food and agricultural programs.

The absence of effective payment limits in current law results in taxpayers subsidizing large farms to bid land away from smaller operations. Large annual six and seven-figure payments to mega farm operations encourage farm expansion beyond the point justified by the market. Subsidies provide large farm owners with an unfair competitive advantage in the local land and rental market. In essence, the taxpaying public is forced to pay for farm consolidation and the loss of economic opportunities in farming.

Current farm programs also ensure that virtually every dollar of farm program payments will be bid into higher land rental and purchase prices, rather than increasing farm operators’ income. While this is of benefit to absentee landowners, the working farmer is left to, at best, tread water and beginning farmers trying to get started in agriculture are locked out of the land market.

Paying on virtually every eligible acre at rates above market prices promotes overproduction and intensifies use of the natural resource base. This harm the environment, while fostering excess production and lower farm prices. Low prices in turn ensure that farm program expenditures remain high.

Most egregious are so-called loan deficiency payments and marketing loan gains which under current law have no effective limitations and are available only for actual production of already overproduced government-designated commodity crops. This system encourages chemical intensive monoculture, discourages diversification, and fosters crop expansion onto marginal lands. By the same token, the uncapped loan deficiency payments and marketing loan gains also serve as export subsidies, encouraging the dumping of US commodities into the world market at low prices. This places producers in developing countries at an unfair disadvantage, reducing their ability to market their crops at a profit.

Payment limitation reform will produce substantial budget savings. These savings can be used to reduce cuts to conservation, rural development, nutrition, and other farm bill programs or to reinvest into new initiatives to create new markets, develop higher value farm products, assist beginning farmers, and spur new rural small business development.