Government Payments & the Farm Sector
Government payments encompass all payments to the farm sector. Under the provisions of the 2002 and 2008 Farm Acts, direct government payments include payments for commodity programs such as direct payments (DPs), counter-cyclical payments (CCPs), and marketing loan benefits (marketing loan gains (MLGs), loan deficiency payments (LDPs), and certificate gains). Also included are other payments such as emergency and disaster payments, tobacco transition payments, and conservation program payments. The 2008 Farm Act introduced Average Crop Revenue Election (ACRE) program payments for the first time.
See the 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.
- Since the introduction of the 2002 Farm Act, farm program payments have averaged about $14 billion per fiscal year.
- Fiscal year 2000 expenditures reached record highs because of 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.
Beginning in 1995, World Trade Organization (WTO) constraints added a new dimension to domestic farm policy. 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 LDPs and MLGs as market prices sagged in 1998-2001. See U.S. WTO Domestic Support Reduction Commitments & Notifications for more information.
The 2008 Farm Act continues the WTO "circuit breaker" provision that gives the Secretary of Agriculture the authority to adjust expenditures "to the maximum extent practicable" to avoid exceeding WTO allowable limits for amber box levels. However, this circuit breaker provision has never been invoked.
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 $76.2 billion in 2007. The majority of green box payments are for food and nutrition assistance programs, not for payments to farmers.
Government program payments for commodity and conservation programs to the farm sector have increased since 1997, averaging $16.2 billion over 1998-2010. Direct government payments are forecast to shrink to about $10.6 billion in calendar year 2011 due to a decrease in disaster payments, and in price-sensitive counter-cyclical payments, marketing loans and loan deficiency payments.
- The 2002 Farm Act replaced production flexibility contract payments with fixed DPs. 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 $4.66 billion for 2011.
- 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 and 2008 Farm Acts, 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.
- CCPs authorized in the 2002 Farm Act help stabilize farm revenues. CCPs rose in 2005-06, reflecting lower commodity prices.
- Marketing loan benefits and CCPs are projected to decrease in 2011 because of higher commodity prices.
- Ad hoc emergency assistance has played a prominent role in U.S. agricultural policy. 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 to 15 years; about 31 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. The 2008 Farm Act replaced the Conservation Security Program with the Conservation Stewardship Program.
Marketing loans are available for 18 commodities. Loan rates are specified in the 2008 Farm Act.
- Marketing loan benefits (MLGs and LDPs) accrue to farmers when commodity prices are at or below 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 DPs 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.
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, cotton has had the largest marketing loan benefits for the past several years.
DPs are paid on a fixed-acreage base with fixed payment yields. Payment rates are fixed in the 2008 Farm Act. Coverage includes the following:
- Feed grains (corn, grain sorghum, barley and oats),
- Upland cotton,
- Minor oilseeds, and
DPs 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 DPs varies by commodity and location. The legislated payment rates are commodity dependent. In addition, program yields reflect historic production levels associated with base acreage.
- DPs 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.
See ERS's Farm Program Atlas for more information on geographical distribution of government payments and program benefits.
CCPs are paid on a fixed acreage base-the same as for DPs. Target prices are specified in the 2008 Farm Act. CCPs are also available for pulse crops.
- 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.
- Since crop year 2006/07, payments have been made only for cotton and peanuts. Prices for the other commodities have been above the target price less the DP rate, so no payments have been made.
- 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.
- Beginning with crop year 2009, producers can elect to participate in the ACRE program in any year from 2009-12 for all covered commodities and peanut acreage on the farm.
- Producers who elect to participate in ACRE must remain in the program for the duration of the 2008 Farm Act.
- For ACRE participants, direct payments are reduced by 20 percent and marketing assistance loan rates are reduced by 30 percent on enrolled farms.
- In 2009/10, the majority of ACRE payments went to wheat farmers.
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 (3.5 percent in 2010, down from 3.9 percent in 2009), indicating that the marketplace is the primary source of farm earnings.