Government Payments and the Farm Sector: Who Benefits and How Much?
Government payments encompass all payments to the farm sector. Under the provisions of the 2002 Farm Act, direct government payments include payments for commodity programs such as direct payments, counter-cyclical payments, and marketing loan benefits (marketing loan gains, loan deficiency payments, and certificate gains). Also included are other payments such as emergency and disaster payments, tobacco transition payments, and conservation program payments.
Based on USDA's annual Agricultural Resource Management Survey (ARMS), receipt of direct government payments is concentrated:
- About 44 percent of all farms received government payments in calendar year 2006.
- Payments averaged $12,687 for those operations receiving payments, accounting for about 8 percent of gross cash income and 39 percent of net cash income in 2006 for those farms.
- The largest 10.6 percent of farms in terms of gross receipts received 55.9 percent of all government payments in 2006.
Heterogeneity within the farm sector results in an unbalanced distribution of government payments. Among the factors influencing the allocation of government payments are farm size (acreage), location, types of commodities produced, and operator and household characteristics.
See Glossary for agricultural policy terms and definitions. For additional information on government payment programs, see Program Provisions.
The direct government costs of commodity support do not include the costs to consumers of programs that restrict supplies and raise food costs, such as the sugar and dairy programs. Also excluded are certain USDA, Natural Resource Conservation Service conservation payments that are not paid through USDA, Commodity Credit Corporation.
- Farm program payments under the provisions of the 2002 Farm Act averaged about $16 billion per fiscal year.
- Fiscal year 2000 expenditures reached record highs due to low crop prices and payment of market-loss assistance payments for the 1999 and 2000 crops.
- CCC expenditures rose to over $20 billion in fiscal years 2005-06 in response to low commodity prices and a jump in disaster and emergency assistance.
- Expenditures are projected to average $11 billion over the next 5 fiscal years as increased demand for corn-based ethanol production continues to result in higher prices for corn and competing crops, reducing price-contingent marketing loan benefits and counter-cyclical payments.
Beginning in 1995, World Trade Organization (WTO) constraints added a new dimension to domestic farm policy. Under WTO rules, certain programs are considered nontrade-distorting green box policies and are unlimited.
U.S. green box expenditures increased from $46.1 billion in 1995 to $71.8 billion in 2005. The majority of green box payments are for food and nutrition assistance programs, not for payments to farmers.
The United States agreed to limit farm-sector support that is considered trade-distorting—referred to as "amber box," or the Aggregate Measurement of Support (AMS). The U.S. amber box limit started at $23.1 billion in 1995 and declined to $19.1 billion beginning in 2000. Actual U.S. amber box support declined in 1995-97, but by 1999 it had risen to within 15 percent of its limit. The rise stemmed from an increase in price-sensitive loan deficiency payments (LDPs) and marketing loan gains (MLGs) as market prices sagged in 1998-2001. See U.S. WTO Domestic Support Reduction Commitments and Notifications for more information.
The 2002 Farm Act included a WTO "circuit breaker" provision that gave the Secretary of Agriculture the authority to, "to the maximum extent practicable," adjust expenditures to avoid exceeding WTO allowable limits for amber box levels. However, this circuit breaker provision has never been invoked.
Government program payments for commodity and conservation programs to the farm sector have increased since 1997, averaging $18.0 billion over 1999-2007. Direct government payments are forecast to grow slightly to about $13.4 billion in calendar year 2008 due to an increase in disaster and emergency assistance.
- The 2002 Farm Act replaced PFC payments with fixed direct payments. These payments are based on historic acreage and yields and are considered "decoupled," that is, not based on current production or prices. Direct payments are forecast at $5.27 billion for 2008.
- Under the 1996 Act, PFC payments decreased according to a payment schedule for major field crops, from a high of $6.4 billion in calendar year 1997 to $4 billion in calendar year 2001.
- Low commodity prices led to significant increases in LDPs and MLGs in 1998-2001 and again in 2005. The marketing assistance loan program, reauthorized in the 2002 Farm Act, prevents the buildup of publicly owned stocks (major field crops) by providing alternatives to defaulting on commodity loans. LDPs and MLGs provide farmers with per unit revenue insulation when prices are low.
- Counter-cyclical payments authorized in the 2002 Farm Act help stabilize farm revenues. Counter-cyclical payments rose in 2005-06, reflecting lower commodity prices.
- Marketing loan benefits and counter-cyclical payments are projected lower in 2008 as increased demand for corn-based ethanol production continues to result in higher prices for corn and competing crops.
- Ad hoc emergency assistance has played a prominent role in U.S. agricultural policy. Direct government payments to producers have partially offset financial losses due to severe weather and other natural disasters (e.g., hurricane, drought, flood), or stressful economic conditions (e.g., low commodity prices, events such as condemnation of milk or animals, or bankruptcy).
- Conservation Reserve Program payments have remained fairly constant since the early 1990s. Payments are tied to environmentally sensitive land retired from production for 10-15 years; about 34 million acres are enrolled in the program.
- Conservation payments tied to working agricultural lands increased under the 2002 Farm Act, with expansion of programs such as the Environmental Quality Incentives Program and Wetlands Reserve Program and introduction of new programs such as the Conservation Security Program.
In 2005, farms in the Heartland received the largest share of both commodity-related and conservation payments. Heartland farms’ 42-percent share of commodity program payments was roughly in line with the region’s 50-percent share of production of program crops.
Loan rates were fixed in the 2002 Farm Act. Marketing loan program coverage was expanded to include peanuts, small chickpeas, lentils, dry peas, wool, mohair, and honey. Marketing loans are available for 18 commodities.
- Marketing loan benefits (marketing loan gains and loan deficiency payments) accrue to farmers when commodity prices are at or below the loan rates.
- An MLG occurs when a producer who has taken out a marketing assistance loan repays the loan at a lower rate. This is permitted when the prevailing market price or posted county price falls below the original loan rate.
- LDPs allow eligible farmers to receive direct payments in lieu of obtaining loans. The LDP rate is the difference between the prevailing market price or posted county price, and the commodity loan rate.
- Marketing loan benefits for crop year 2007/08 are forecast to be near zero due to high commodity prices.
Comparing marketing loan benefits across commodities on a per-harvested-acre basis adjusts for the large differences in the amount of land devoted to individual commodities.
- Marketing loan benefits are not necessarily paid in every year.
- On a per acre basis, rice had the largest marketing loan benefit of almost $170 per harvested acre in 2003/04.
- In 2004/05, cotton payments were the highest at about $135 per harvested acre.
Direct payments replaced PFC payments in the 2002 Farm Act. These payments are paid on a fixed-acreage base with fixed payment yields. Coverage was expanded to include:
- Soybeans,
- Minor oilseeds, and
- Peanuts.
Direct payments are not linked to current production. Producers are free to plant most crops on base acreage, with some limitations on planting fruit and vegetables. Producers can even elect to leave the land idle. Thus, these payments are considered to be minimally production- and trade-distorting.
The value of direct payments varies by commodity and location. The legislated payment rates are commodity dependent. In addition, program yields reflect historic production levels associated with base acreage.
- Direct payments for oats average about $1 per acre, while payments for rice average close to $100 per acre.
- Payments are concentrated in major producing areas. They are highest in California, where rice and cotton are important, in the Southeastern Coastal Plain, where cotton and peanuts are produced, and along the lower Mississippi River, where cotton and rice are produced. Payments per acre are also high in the Corn Belt, where corn and soybeans are the predominant crops.
Counter-cyclical payments (CCPs) are a new program introduced in the 2002 Farm Act. They are paid on a fixed acreage base—the same as for direct payments.
- The payment rate for CCPs equals a so-called "target price," minus the direct payment rate, minus the higher of the market price or the loan rate. Thus, when market prices fall, the payments increase.
- In crop year 2003/04, payments were made only for upland cotton, rice, and peanuts and in 2006/07 payments were made only for cotton and peanuts. Prices for the other commodities were above the target price less the direct payment rate, so no payments were made. It is expected that in crop year 2007/08, payments will again be made only for cotton and peanuts.
- Because CCPs are linked to market prices, the payments may indirectly affect production by reducing revenue risk. Further research is necessary to fully understand how farmers react to CCPs.
- As is the case with direct payments, farmers do not have to produce a crop to get the payment.
- Peanuts receive the highest payment per base acre followed by upland cotton, rice, and corn, depending upon the year.
Gross cash income includes cash income from farm receipts and government payments; expenses are subtracted from gross cash income to calculate net cash income. Off-farm sources of income are not included in this measure.
Across all farm types, government payments represent a small portion of gross cash income (5.6 percent in 2006, down from 7.6 percent in 2005), indicating that the marketplace is the primary source of farm earnings.
ERS's farm typology distinguishes between farm types based on level of sales and the occupations of operators.
- Commercial farms have annual sales of $250,000 or more.
- Farms with annual sales below $250,000 are divided into:
- Intermediate farms, whose operators report agriculture as a full-time occupation, and
- Rural residence farms, which include retirement and residential/lifestyle farms.
Data used for analysis by farm type are from USDA's Agricultural Resource Management Survey (ARMS). The most current year of available data is 2006.
- Many farms across the various types receive some level of government payments; however, the distribution of payments does not reflect the number of farms within each farm type.
- Large commercial farms make up 10.6 percent of all farms, yet they received 55.9 percent of government payments in 2006. This is a direct result of commodity programs targeting certain types of commodities, which are often grown on large farms and in large volumes.
- While almost 37 percent of rural-residence farms received government payments in 2006, about 16 percent of gross cash income for these farms came from government payments.
- About 71 percent of commercial farms received government payments, but payments represented only 6 percent of their gross cash income.
- Commercial farms experienced a larger percentage reduction in government payments from 2005 to 2006 than intermediate and rural residence farms.
- In 2006, direct payments were the largest payment category for commercial and intermediate farms, while conservation payments were the largest payment type for rural residence farms.
- The average payment for commercial farms in 2006 was $41,642, which was 6 percent of average gross cash income in that category.
- The average payment for rural residence farms in 2006 was $4,610. Government payments account for a higher share of farm income for this group than for other groups.
- The "Other" category includes emergency and disaster payments, milk income loss payments, peanut buyout payments, and tobacco transition payments.
- Commercial farms obtained about 67 percent of their total household income in 2006 from farming activities.
- Households operating family farms (intermediate farms) on average had small, but positive earnings from farming in 2006. Intermediate farms produced 15 percent of U.S. agriculture’s value.
- In 2006, rural residential farmers produced 7 percent of U.S. agriculture's value. Average income from farming activities was negative $3,232 for this group, although some farms within the group had positive income. Average off-farm income for this group was the highest of the farm typology groups.
- Average total income for commercial farms and rural residence farms exceeded the average household income of all U.S. households.
See Farm Income and Costs: Farms Receiving Government Payments for additional information.
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