ERS Analysis:
Direct Payments

2002 Farm Bill Home Title I: Commodities Title II: Conservation Title III: Trade Title IV: Nutrition Title V: Credit Title VI: Rural Development Title VII: Research Title VIII: Forestry Title IX: Energy Title X: Miscellaneous   Resources Details & analysis Background publications Farm policy glossary Farm bill summary Download the farm bill Related USDA Agencies Farm Service Agency Foreign Agricultural Service

Key Changes

Fixed direct payments (DP) replace production flexibility contract (PFC) payments (sometimes referred to as AMTA payments). Payment rates for wheat, corn, barley, grain sorghum, oats, upland cotton, and rice are fixed in the 2002 Farm Act. Soybeans, other oilseeds, and peanuts are also covered under new rules established in the 2002 Farm Act.

Summary of Provisions

Under this new program, farmers and eligible landowners receive annual DPs. The amount of the payment is equal to the product of the payment rate of the applicable base crop, the payment acres (85 percent of base acres), and the payment yield for the farm. For example, the payment for an individual corn farmer is

DP_corn = (payment rate)_corn x (payment yield)_corn x ([Base acres]_corn x 0.85)

To receive payments on crops covered by the program (wheat, corn, grain sorghum, barley, oats, rice, upland cotton, soybeans, other oilseeds, and peanuts), a producer enters into annual agreements for crop years 2002-07.

Farmers have two options for designating base acres:

• Choose base acres equal to contract acreage for the commodity that would otherwise have been used for 2002 PFC payments plus average oilseed plantings in crop years (CY) 1998-2001, so long as base acres do not exceed available cropland, or
• Update base acres to reflect the 4-year average of acres planted, plus those "prevented from planting" due to weather conditions, during CY 1998-2001.

Each producer must select one of the two options to apply to all covered commodities for both direct payments and counter-cyclical payments. Base acres for peanuts can be determined separately, so long as total base acres do not exceed available cropland. Payment acres are equal to 85 percent of the base acres.

Owners of farms will have a one-time opportunity to select a method for determining base acreage. An owner who fails to make an election shall be considered to have selected 2002 PFC contract acres and, for oilseed base, the 4-year average of oilseed plantings.

Farmers are given almost complete flexibility in deciding which crops to plant. Participating producers are permitted to plant all cropland acreage on the farm to any crop, except for some limitations on planting fruits and vegetables. The land must be kept in agricultural uses (which includes fallow), and farmers must comply with certain conservation and wetland provisions.

Program payment yields are unchanged for those crops previously covered under the PFC program. For soybeans and other oilseeds, which were added to the program, payment yields are the farm’s average yields for 1998-2001, multiplied by the national average yield for 1981-85, divided by national average yield for 1998-2001. Peanut payment yields are based on the farm’s average yields for 1998-2001.

Direct payments for the 2002 crop are to be made as soon as practicable after enactment of the Farm Act. For CY 2003-07, payments are to be made no sooner than October 1 of the year the crop is harvested. Advance payments of up to 50 percent can be made beginning December 1 of the calendar year before the year when the covered commodity is harvested.

The payment limit on direct payments is $40,000 per person, per crop year, and the three-entity rule is retained. Under the three-entity rule, an individual can receive a full payment directly and up to a half payment from two additional entities. Producers with adjusted gross income of over $2.5 million, averaged over each of 3 years, are not eligible for payments unless more than 75 percent of adjusted gross income is from agriculture.

Economic Implications

Fixed direct payments are not tied to production of specific crops, the amount of production, or the price of the crop. With planting flexibility, farmers are not confined to producing crops for which they are receiving direct payments. They could receive a payment for corn, but in any given year, for example, plant soybeans on the acres in which they are receiving corn payments. Thus, farmers' planting decisions are based on expected market prices and variable costs of production.

The economic impacts for DPs are similar to those for production flexibility contract payments under the 1996 Farm Act. DPs increase farm income. Since PFC payments increased producer wealth and could have facilitated additional investment, PFC payments likely led to slightly higher crop production (U.S. Farm Program Benefits: Links to Planting Decisions and Agricultural Markets). However, since producers have the option of updating base payment acres in 2002 from 1996 levels, and since new crops have been added to the program, farmers may have an incentive to continue producing crops and/or to expand production in order to maintain a production history in anticipation of future opportunities to expand payment acres.