Summary

Deficiency payments are the main payments made to producers who participate in farm programs for wheat, feed grains, cotton, and rice. The payments are meant to protect farmers' incomes when crop prices fall below a certain level. The Food Security Act of 1985 limited the payments for those commodities to $50,000 per person annually. GAO reported in 1987 (see GAO/RCED-87-176, July 20, 1987) that it was fairly easy for producers to avoid the limit by reorganizing their farm operations through limited partnerships and the like. In response, Congress passed legislation that year to prevent producers from skirting the payment limit and to cut farm program costs. GAO concludes that this law has been only minimally effective, with big farm operations using loopholes to maintain subsidies in excess of the $50,000 limit. GAO continues to believe that implementation of the recommendations in its 1987 report would more effectively limit program payments and reduce program costs. This approach would (1) ensure that individuals actively engaged in farming would not receive more than $50,000 in payments, either as individuals or through business entities, and (2) eliminate the benefit gained by reorganizing in order to maintain or increase total payments to the farming operation.

GAO found that the Food Security Act of 1985 limited deficiency payments, which are designed to protect agricultural producers when crop prices fall below an established target price, to $50,000 per person. GAO also found that the 1987 amendments had a very limited effect in reducing payments, since: (1) the amendments allowed equitable reorganizations under which farmers could reorganize their farming operations, within a specified time period, to avoid any reductions in their total payments; (2) USDA required that only 50 percent of a corporation's ownership provide significant contributions of personal labor or active personal management for the corporation to meet the requirement that it be actively engaged in farming; and (3) individuals could qualify for payments from up to three eligible entities. In addition, GAO found that: (1) because the amendments' provisions worked against one another, the provisions only reduced 1989 program payments by $3.4 million; (2) according to a USDA report, 12 of the 52 farming operations reviewed reorganized their business structures to avoid losses in payments; and (3) USDA computer systems effectively monitor and limit payments to producers.