Debate over limits on payments by farm safety net programs has become increasingly passionate. In the current 2012 Farm Bill debate, significant attempts likely will be made (1) to further tighten existing payment limits and (2) to implement limits on crop insurance. Therefore, this post discusses the history and several interrelated topics concerning farm payment limits. Please note, this discussion neither endorses nor opposes payment limits.

Historical Background

To the author's knowledge, the first limit on payments by farm programs ($10,000) date to the Agricultural Adjustment Act of 1938. Thus, farm payment limits are nearly as old as the farm safety net itself, which began in 1933. However, payment limits did not become a continuous part of farm bills until the Agricultural Act of 1970, which limited total government payments to $55,000 per farmer per crop. Current limits on payments by individual farm programs are:

•$40,000 on direct payments if a farmer does not participate in ACRE and a $32,000 limit if a farmer participates in ACRE,

•$65,000 on counter-cyclical payments, and

•$73,000 on payments by ACRE (limit varies by farmer; this is the highest limit).

Means testing for farm programs, a type of payment limit, was added in the Farm Security Act of 2002. Means testing prohibits or reduces payments to an entity with a high enough income. Specifically, producers with adjusted gross income of over $2.5 million, averaged over the previous 3 years, were ineligible for direct and counter-cyclical payments, marketing loan benefits, and conservation payments. However, an exception was granted if 75% or more of adjusted gross income was from farming, forestry, or agriculture. After lengthy debate, the means test was tightened to the following in the Food, Conservation, and Energy Act of 2008:

(1) An entity with an adjusted gross farm income of over $750,000, averaged over previous 3 years, is not eligible for direct payments.

(2) An entity with average adjusted gross nonfarm income in excess of $500,000 is not eligible for direct payments, as well as payments from the counter-cyclical, ACRE, marketing loan, noninsured crop assistance, milk income loss contract, or disaster assistance programs

(3) Producers with adjusted gross nonfarm income, averaged over 3 years, in excess of $1 million are not eligible for conservation, supplemental agricultural disaster assistance, and agricultural-risk-management assistance unless 66.66% or more of total income was average adjusted gross farm income.

Two other aspects of payments limits also are important. First, limits are not usually attached to a farm or a farmer but to a payment entity. For example, spouses of farmers may be eligible for their own payment limit under the 2008 Farm Bill. Second, it is not uncommon for farm bills to exclude some farm programs from payment limits. For example, the current 2008 farm bill has no payment limit on marketing loans. However, the U.S. Senate voted 75 to 24 to accept an amendment to its 2012 Farm Bill that would limit marketing loan gains to $75,000 per entity. The U.S. Senate also voted 66 to 33 to accept an amendment to its 2012 Farm Bill that would reduce the crop insurance subsidy for farmers with adjusted gross income of more than $750,000.










Why Interest in Payment Limits Has Increased?

It is not clear why payments limits became a continuing part of the farm bills with the 1970 Act, but one likely reason was the transformation from programs that established floors under prices to programs that made payments to farmers. This transformation began in the 1960s. A second likely reason reflects an on-going historical trend that underpins much of the historical and contemporary debate over farm program payment limits.

One of the foundation reasons for enacting a farm safety net in 1933 was the poverty of U.S. farm families. In 1934, per capita income of the farm population was only 33% of the per capita income of the non-farm population (see Figure 1). However, due to technological change, migration out of farming, and the growth in nonfarm income earned by farm families; the income of farm families has improved notably. By 1970, per capita income of the farm population had reached 70% of the per capita income of the nonfarm population. Per capital income is no longer reported for the farm population. Instead the ratio of average farm household income to average U.S. household income is reported. This ratio is first available for 1960, when it was 65%. By 1970, the ratio had reach 94%. The ratio exceeded 100% in 1972 and has been consistently above 100% since 1996. For the latest year available, 2010, the ratio is 125%.

Debate occurs over whether these measures of farm well being are the most appropriate. One argument is that the appropriate comparison is between farm businesses and self employed Americans. Nevertheless, it is difficult to say that a different measure would alter the long run trend depicted by the above data. Also, it is important to remember that farm programs involve income transfers from taxpayers to farmers. Thus, comparison with average household income is at least one relevant perspective. In summary, the historical trend of increasing parity between farm and nonfarm income has prompted proponents of payment limits to ask whether it is fair that farms, in particular large farms, receive government payments when their income is close to or above the national average for all households.