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Direct Payments at Risk

February 29, 2012
By: Fran Howard, AgWeb.com Contributing Writer
 
 

Attention shifts to farm country as incomes rise

Society has become increasingly polarized based on the existing distribution of wealth, as
evidenced by the inability of legislators to agree on any economic issues—big or small—facing the country. Wealth disparity has not only increased between farm and non-farm households but also between large and small farms. As a result, most analysts think greater efforts will be made this year to reduce or eliminate farm subsidies, specifically direct payments.

According to USDA’s Economic Research Service (ERS), 2011 net farm income is expected to reach $100.9 billion, up $21.8 billion or 28% from 2010. Crop sales in 2011 are expected to pass $200 billion for the first time in history, and livestock sales are predicted to rise almost 17%. At the same time, 2011 government payments are forecast to decline 14.4% compared with 2010 levels to $10.6 billion.

Direct payments, which account for about half of all government payments, have been under fire from taxpayer groups for years. Unlike disaster payments or crop insurance, direct payments are
considered "income enhancing" because they are made regardless of whether a farm has a production loss or any production at all. The nation’s largest farms have taken the brunt of the criticism, along with absentee owners and farms that no longer produce anything.

"The implausibility of sending checks to farm households with no indication of need has been an issue, but it becomes a bigger issue when farm households are doing much better than other U.S. households. It’s rubbing people the wrong way," says Craig Cox, senior vice president of the Environmental Working Group, a nonprofit orga-nization that opposes direct payments but supports a basic farm safety net.

City Versus Rural Households. Since the 1980s, ERS has reported an income measure for farm operator households and then compared it to the U.S. Census Bureau’s measure for all U.S. households. "For every year since 1996, average farm household income has exceeded average U.S. household income," says Mary Ahearn, the economist who heads up the report. "In fact, even the off-farm income component of average farm operator household income has exceeded average U.S. household income from all sources since 1998."

p62 Direct payment at risk   chart

According to the latest information available from the Federal Reserve, the median net worth for all U.S. households was $120,300 in 2007, compared with $534,727 for farm households. However, average net worth for U.S households dropped to $96,000 by 2009 as a result of the recession, according to the Fed. Since the residential real estate peak in 2006–07, average housing prices have fallen roughly 33%, erasing nearly $7 trillion in household wealth, according to a recent white paper from the Fed.

At the same time, U.S. average farmland values rose by about 17% from 2007 to 2010, and 2011 was no exception.

Small Versus Large Farms. While wealth disparity between nonfarm and farm households is growing, the real battle for government subsidies historically has been among the various commodities and farms within a commodity group based on size. The largest farms, which represent 10% of all family farms and are considered to be "commercial farms," have gross annual farm income of more than $250,000. These 214,000 farms had an average net worth of $2.4 million in 2010 and an average annual farm income of $185,098 (depreciation included). Although these farms receive only 62% of all government farm payments, they produce 82% of the country’s agricultural commodities.

p64 Direct payment at risk   chart2

At the other end of the spectrum are the 400,000 farms that produce little or nothing but still receive government payments. The majority of family farms (about 60%) had gross sales of less than $10,000 in 2010 and negative average farm incomes. Their average household income of $75,000 was derived entirely from off-farm sources.

The farms in the middle have gross sales of $10,000 to $249,999 and represented 30% of family farms in 2010. On average, these farms earned positive returns from their operations and less from off-farm sources than the smallest farms. Their average household income of $78,716 in 2010 was only slightly more than that of the smallest farm households.

Pointing to farming operations in the drought-stressed Southern Plains, Ernie Goss, an economist with Creighton University, stresses that not all farm households benefited from record-high farm income levels. Rural households not linked to farms are struggling, he adds.

Hot Talking Point. As the farm bill debate heats up, the struggling middle class will be a bigger part of the discussion on farm subsidies. "Traditional [direct] payments will be difficult to defend," says Matt Roberts, an agricultural economist at The Ohio State University.

Chad Hart, an agricultural econ-omist at Iowa State University, believes that direct payments will be drastically reduced (by $23 billion to $30 billion) or eliminated in the next farm bill. "Ag has been pro-active in proposing farm programs that save money and shift the burden to risk management," he says. "Will Congress go for it? I think yes, but the question is, how deep do the cuts need to be?"

Yet even agricultural groups are not in agreement on where the cuts should come from, with wheat and cotton producers more dependent on direct payments than corn and soybean growers. In 2011, during the deficit-reduction committee’s failed attempt to cut the federal budget deficit, corn and soybean producer associations developed plans to trade direct payments for a revenue-based program that would trigger payments only if a farm’s revenue dropped below recent five-year price average levels. At the same time, they hoped to shift some savings into crop insurance programs.

"Crop insurance is available on more than 100 commodities, from corn to macadamia nuts, from conventional to organic," Hart says. By being proactive, agriculture is giving a polarized Congress a rare opportunity. "Ag groups are stepping up to get something done," he says, as they realize cuts might be deeper later.

With more attention being paid in political debates to income and wealth disparity, some say it is time to change the tenor of the farm bill debate by focusing on conservation, nutrition and rural development. "That’s how agriculture can appeal to nonfarm votes," Hart says.

The 2008 farm bill expires in October. If a new bill is not enacted and the 2008 bill is not extended, the law will revert to regulations in the 1949 farm bill.

"Plan on not having direct payments," Goss says. Also, cutting the Conservation Reserve Program will be more difficult.

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FEATURED IN: Top Producer - March 2012

 
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COMMENTS (4 Comments)

Little Gary - IN
OK, around where I live in Central Indiana the farms are huge and the farmers and farm families are super rich. I am guessing net worths of $10-30M at today's farm values. The average person sees this and realizes that there is a giant sucking sound from these farms as the taxpayer gets taken advantage of. The ridiculous corn ethanol mandate, direct payments, crop insurance subsidies, tax breaks, on and on and on. People are fed up with this class of landed gentry that sits around 4 months of the year doing nothing. When they are "working" its mostly driving machinery and collecting government subsidies and subsidized crop prices. Even access to credit Farm Credit is subsidized and you see these rich farmers running around in brand new trucks all the time and building little party barns outside their houses and doing some of the stupidest most wasteful things and I think people have finally woken up to it. I would love to see the end of direct payments, crop insurance subsidies AND the corn ethanol mandate. That would get us back to a level playing field in my mind.
12:03 PM Mar 8th
 
ohiofarmer44 - St. Paris, OH
Income is net of expenses. It's what you have leftover after all bills are paid (which includes your fuel bills), so if you're that concerned about how much fuel you have to buy, maybe you should incorporate that into your management strategy and buy-up in your crop insurance for the added revenue protection. Farm expenses may have never been higher, but isn't the same true about grain prices?? Operating loan rates fluctuate according to market demand, and similar to the housing market, have extremely reasonable interest rates.
10:46 AM Mar 8th
 
ohiofarmer44 - St. Paris, OH
Income is net of expenses. It's what you have leftover after all bills are paid (which includes your fuel bills), so if you're that concerned about how much fuel you have to buy, maybe you should incorporate that into your management strategy and buy-up in your crop insurance for the added revenue protection. Farm expenses may have never been higher, but isn't the same true about grain prices?? Operating loan rates fluctuate according to market demand, and similar to the housing market, have extremely reasonable interest rates.
10:46 AM Mar 8th
 
PullMyFinger - Chappell, NE
How much fuel do the non-farm households have to buy? Maybe that "tax" should be deducted before you start comparing incomes? Farm expenses have never been higher so why would any subsidies be going down? Let's talk about the antiquated commodity loan rates instead.
9:11 AM Mar 8th
 



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