What is in this article?:
- History, observations of direct ag payments
- Entity vs. Per Unit
- 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.
Entity vs. Per Unit
Payment limits are usually thought of limits on payments to a payment entity. As noted above, entity payment limits come in the form of means tests and limits on payments by a specific program or a set of programs. However, a second type of payment limit exists: limits that reduce payment per unit of a commodity to less than 100%. For example, counter-cyclical and ACRE payments currently are made on 85%, not 100%, of eligible acres. Another example is that the highest coverage level for individual crop insurance is 85%.
Historically, entity payment limits have always attempted to limit payments to the largest farms. Because of their focus on only the largest farms, entity payment limits generally reduce the cost of farm programs by only a small amount. In other words, historically entity payment limits have been more about social fairness than cost savings. However, given the current U.S. federal budget deficit, entity payment limits may gain more appeal as a way to reduce the budgetary cost of farm programs.
In contrast, per unit output payment limits almost always seek to reduce the overall cost of a program. They can attain this goal because they affect all recipients of farm program payments.
While different in focus, the two types of payment limits do interact. In particular, reducing per unit payments reduces the probability that entity payment limits will be exceeded. Thus, for example, the U.S. might choose to address the debate over crop insurance subsidies for large farms by treating it as an associated outcome of reducing the insurance subsidy level for all farms in order to reduce the cost of farm safety net programs.
As with any program parameter, limits on payments from a program should be designed to be consistent with the objective and operation of the program. For example, the direct payment program is designed to make payments to farms. Thus, placing limits on payments to entities is consistent with the objective and operation of the direct payment program.
In contrast, limits on payments seem inconsistent when a program's objective is to help manage risk. Risk management programs will make large payments when a sizable shortfall in revenue, yield, and/or price occurs. Moreover, occurrence of such a shortfall is not known when planting decisions are made. To limit payments when they are most needed is inconsistent with the objective of helping to manage risk.
In the case of crop risk management programs, risk occurs on an acre planted to a crop. Given this observation, it would be more consistent to limit the number of acres eligible for a risk management program or crop insurance subsidy. Limiting eligible acres means that the farmer knows before planting what his/her risk exposure is, and thus can make appropriate management decisions both on the land eligible for the risk management program and on the land that exceeds the acreage limit. As a result, the farm's use of resources should be more efficient.
Putting a dollar limit on insurance subsidies is a more consistent policy decision than putting a dollar limit on insurance payments because the subsidy limit would be known before planting. Thus, a farmer can make managerial adjustments to efficiently use his/her resources. However, putting a dollar limits on insurance subsidies will discriminate against high value crops. The reason is that insurance subsides are related to insurance payments, which in turn are related to the gross value per acre of a crop. Thus, limiting the dollar value of insurance subsidies may end up influencing planting decisions.
The history of farm policy and underlying economic trends suggests that payment limits are likely to become an even more important topic of debate in farm bills. The only exception might be if farm family income deteriorates relative to non-farm family income. Given this situation, it is important that informed debate occur, particularly in regard to how to design payment limits to minimize negative impacts on the efficiency with which farmers use resources.
Sources for Figure 1: (1) U.S. Department of Agriculture, Economic Research Service, "Economic Indicators of the Farm Sector: Income and Balance Sheet Statistics, 1983," ECIFS 3-3. (2) U.S. Department of Agriculture, Economic Research Service, "Farm Household Economics and Well-Being: Historical Data on Farm Operator Household Income," accessed June 20, 2012 at http://www.ers.usda.gov/Briefing/WellBeing/Gallery/historic.htm.