Posted by: Phillip Fraas
February 10, 2008
Topic: REPORTS ON 2008 FARM BILL STATUS--January 2008 To Enactment

Still no word on a breakthrough in the deadlock between the Administration and Congress that is holding up passage of the farm bill. Key issues separating the two sides are the farm bill budget and the AGI cap included in the bill's payment limitation provisions. Likely, if their differences can be resolved on the budget-how much above the baseline to go and how to pay for excess spending-a compromise on the AGI cap could come fairly quickly.

The budget debate is straightforward and doesn't take a lot of explaining; the AGI cap/payment limitation issues, on the other hand, have some history and technical twists that are worth exploring.

BACKGROUND: First of all, it is important to keep in mind that farm bill payments are not made on all crops, so the limitations are not an issue for many U.S. farmers. Payments are made to producers of wheat, corn, other feed grains, cotton, rice, oilseeds, peanuts, honey, wool, and mohair, but not to cattle, hog, or poultry producers, or to fruit and vegetable growers. Of course, the crops that do get payments are produced on tens of thousands of farms, so it is still safe to say that pay limits are a very important farm policy issue.

Farm program payment limits have been around since the 1970 farm bill. Earlier farm bills had not relied on direct payments to farmers to provide a safety net for farmers; rather they depended on controlling supplies to increase farmer's market prices. But, with the advent of direct payments, news reports began popping up about big operators receiving huge amounts of taxpayer money, including, if memory serves me right, the Queen of England, who had an interest in a Mississippi cotton plantation. Thus did Congress feel compelled to draw up the first limitation rules in 1970.

In the 1985 farm bill, payment limitation rules were tightened to close loopholes and otherwise ensure that the limitation rules operated fairly and equitably. Then, in the 2002 farm bill, a new twist was added to keep payments targeted to traditional family farmers: participation in the farm payment programs was limited to operators whose adjusted gross income (AGI) was less than $2,500,000 annually (excluding persons who derived 75% or more of their income from farming, ranching, or forestry). Also, a payment limitation commission was established to look at further reforms and updating of the payment limitation rules.

ADMINISTRATION PROPOSAL: Piggybacking on the payment limitation commission's work, the Bush Administration last year proposed substantial changes in the AGI cap and payment limitation rules. It recommended slashing the AGI cap down to $200,000 annually and eliminating the 75% farm income exemption, arguing that these moves would hit less than 72,000 of the 2,000,000 plus taxpayers who file farm returns.

Also, the Administration proposed doing away with the so-called "three-entity" rule. Under current law, individuals or entities (corporations, limited liability companies, trusts, etc.) that receive payments (and thus are subject to payment limitations on them) can also own stock or otherwise have beneficial interests in two other entities engaged in farming and receiving payments but only if they don't have a majority ownership (51% or more) in them. Under the Administration's proposal, the business entities an individual is involved with will be ignored, and all payments to and through those entities will be directly attributed to the individual human beings who own them, and the limitations applied to those individual persons.

In addition, the Administration proposed tweaking the individual payment limitations, keeping the overall limit at $180,000 per person, but increasing the limit for direct program payments from $40,000 to 55,000 and reducing the counter-cyclical payment limit from $65,000 to $55,000 and the limit on marketing loan benefits from $75,000 to $70,000. Further, they would get rid of the separate payment limitation for peanuts, lumping that crop in with all the others subject to the general pay limits.

CONGRESSIONAL APPROACH: The House and Senate-passed farm bills make similar major changes in payment limitation rules, but don't go as far as the Administration did in reducing individual limitation levels or the AGI cap. Instead, it appears that Congress has heeded complaints of some that the Administration's pay limit proposals would adversely affect the large-scale operations that are needed to efficiently grow some crops like rice, and that the $200,000 AGI cap would be unfair to many commercial-sized operations.

While the Senate and House follow the Administration in proposing to repeal the three-entity rule and apply payment limitations through direct attribution, they would tweak the actual limitations differently. Both would actually do away with any limitations on marketing loan benefits. Then, the House bill would increase the limitation on direct payments to $60,000 annually but keep the $65,000 limitation on counter-cyclical payments. The Senate version would reduce the direct payment limit to $40,000 annually and the counter-cyclical limit to $60,000. Each would also keep peanut limitations separate from the general limits.

Both bodies propose a middle ground alternative on the AGI cap. The Senate would keep the current AGI cap for the first year of the new farm bill (2008), but reduce it to $1,000,000 in 2009 and to $750,000 thereafter; and it would exempt from the cap operators that derive more than 2/3 of their income from farming, ranching, and forestry. The House approach is to set the AGI cap at $1,000,000 for all operators, but apply a lower, $500,000 cap unless the operator derives more than 2/3 of income from farming, ranching, or forestry.

THE END RESULT? Once the budget fight is settled, the Administration and Congress will be under tremendous pressure from farmers and farm groups to wrap up negotiations on other issues and get a farm bill enacted right away. I expect the Administration will insist that the farm bill include a good portion of its payment limitation reforms, but both houses of Congress can say that they in fact have already done so. That would leave the most contentious pay limit issue-the AGI cap-to be resolved. There, I could see them settling their differences somewhere in the middle in an effort to speed passage of the legislation..

In any case, based on what is already in the House and Senate versions, it is clear that the new farm bill will include major changes in the payment limitation rules. Larger farmers should start thinking now about what the likely changes will mean for them, and what steps they might need to take to preserve as much as they can the cash flow they have come to expect from farm program payments.

News

FOCUS ON THE AGI CAP/PAYMENT LIMITATIONS: What The Debate Is About And What Is Being Proposed

News

Environment

Topics

Recent Updates

Archives

Web Resources