Each year, the U.S. Department of Agriculture (USDA) makes billions of dollars in total payments to farmers across the country. They rely on these payments as part of a strong safety net, which helps them mitigate the steep risk that comes with working in the agricultural sector. Congress historically put in place some common sense limits on farm program payments, but left open notable loopholes that damage their integrity and effectiveness.
What does it mean to be “actively engaged” on a farm?
Under current law, farmers are required to be actively engaged in farming to receive farm program payments. “Actively engaged” is a term used by the USDA to distinguish those who provide significant contributions to the operation, which also means assuming the risk that comes with farming, from other partners or members of the operation. According to the USDA Farm Service Agency (FSA), contributions to the farming operation can include capital, land, equipment, active personal labor, or active personal management. For individuals and entities, there must be a balance between their share of an operation’s profits and losses, as well as contributions to the operation at risk to meet the actively engaged criteria.
So, what does this mean? The individuals who receive commodity program payments should be on the farm or in the tractor; investing in land and/or equipment; or providing capital for the farming operation.
Report examines payments to farming operations
As a result of multiple reports of payment abuse, the U.S. Government Accountability Office (GAO) examined USDA FSA payments to farming operations in 2015. This report was released in May 2018, and the numbers are staggering.
Despite long-standing legislation surrounding payment limitations, in 2015, taxpayers provided $260 million in farm program payments to individuals who do not work on a farm.
The GAO report also discussed the distribution of farm program payments between entities. The report did not include figures for sole proprietorships (i.e. individual farmers), but focused on entities such as general partnerships, joint ventures, corporations, limited liability companies (LLC), and other entities.
What makes up these entities? The USDA defines each entity.
- General partnership: An association of multiple persons treated as separate and individual for the purposes of determining eligibility for payments and payment limits. Can include both individuals and entities, i.e. corporations or LLCs.
- Joint venture: An association of two or more individuals who pool resources and share profits and losses. Can include both individuals and entities, i.e. corporations or LLCs.
- Corporation: An association of joint owners treated as a single person for the purposes of determining eligibility for payments and payment limits.
- Limited liability company (LLC): Shared ownership and liability limited to the assets of the company. Treated as a single person for the purposes of determining eligibility for payments and payment limits.
- Other entities: Legal entities such as limited partnerships, irrevocable and revocable trusts, estates, churches, charities, and nonprofit organizations. Can qualify as single persons under payment limitation policy.
In 2015, general partnerships comprised nearly 24 percent of all entities that received payments, and received nearly 47 percent of all payment dollars. The average payment to a general partnership was nearly $57,000. Because of their structure, general partnerships have the ability to receive more payments as the number of actively engaged individual partners increases. A general partnership might include individual farmers, corporations, or LLCs. If they are all family members; each corporation, LLC, or individual farmer meeting actively engaged eligibility criteria can receive farm program payments. For example, the GAO found that, in 2015, the USDA paid $3.7 million to one farming operation – which was comprised of two individuals and 32 corporations. This operation reported having 25 members (plus 10 spouses) who contributed active personal management, but no personal labor (meaning they weren’t spending countless hours in the field).
Corporations included nearly 32 percent of payment-receiving entities, and captured nearly 29 percent of all payment dollars. In 2015, the average payment to a corporation was nearly $26,000. Corporations are treated differently than general partnerships, as they are viewed as one individual.
Conversely, LLCs, who constituted more than 24 percent of entities that received payments, collected approximately 13 percent of all payments. Average payouts for LLCs were under $16,000, which is significantly less than what general partnerships or corporations received in 2015. Similar to corporations, LLCs are also viewed as one individual. Since they are viewed as an individual, they cannot increase the number of individuals eligible to receive up to $125,000 in farm program payments.
The clear majority of payment dollars were divvied out to general partnerships, which is likely due to the exemption from farm payment limitations as entities. Farming operations that are general partnerships or joint ventures have a payment limit per member. This means each member in the entity can receive farm program payments if they meet payment eligibility requirements. For nonfamily farming operations, this includes no more than three members that meet the eligibility criteria for farm program payments. This differs from family farming operations, as there is no limit regarding the number of eligible members who can receive payments. Other entities, such as corporations or LLCs, are subject to payment limitations for the entity in its entirety. The current payment limitation policy allows for general partnerships to take a bigger piece of the pie, as more dollars can be applied to all eligible individuals, rather than being capped.
Lastly, the data showed current policy reinforces the largest and wealthiest farming operations. On average, the top 50 operations each received nearly $900,000 in payments. The average number of individuals and entities for these operations is 8.3 – which means participating individuals or entities received well over $100,000 each.
Payment limitations: not a new concept
The GAO’s findings are not unfounded, as concerns regarding abuse of farm program dollars have been voiced for many decades. To help ensure payments were going to actual farmers, Congress implemented the Agricultural Reconciliation Act of 1987, also known as the Farm Program Payments Integrity Act. This legislation’s intent was to limit payments to those who are actively engaged in farming, and discourage abuse of the payments to individuals in an operation.
During the Agricultural Act of 2014, also known as the 2014 farm bill, both the House and Senate agreed to close payment limit loopholes for commodity programs. Despite widespread support for sound, enforceable regulations introduced in legislation by Sen. Chuck Grassley (R-IA) and Rep. Jeff Fortenberry (R-NE), a weaker version was passed by the conference committee.
While discussions regarding farm program payments remain contentious, some limits have been determined in past farm bills. Today, there are several limits in place, but their effectiveness is watered down by loopholes within the safety net. Most recently, the failed House draft of the farm bill had provisions that would create or expand loopholes:
- Exempt corporate farms from a single payment limitation, which would increase the number of farm corporations eligible to receive unlimited farm subsidy payments;
- Remove payment limitations from marketing loan gains and loan deficiency payments;
- Allow mega-farms to reorganize as “family farms” to include payments to extended family members such as nieces, nephews, and cousins; and
- Exempt the largest farm operations (more than $900,000 adjusted gross income) from adjusted gross income means-testing, which would allow the wealthiest farmers to qualify for commodity payments.
One of the most concerning provisions found in the House draft of the farm bill addresses “family farms.” Under the current farm program payment policy, farming operations, that are comprised solely of family members, are exempt from active personal management restrictions, as well as the number of individuals qualifying for payments. With a proposal to include additional payments to extended family, including nieces, nephews, and cousins, more dollars will be used to support very large operations. This is not what most people think a family farm looks like, and for many family farms across America, this could not be further from reality.
Additionally, the removal of policy-limiting payments to large farming operations, with an adjusted gross income of nearly $1 million, means fewer dollars will be distributed to small- and mid-sized farms that need assistance to weather difficult times. As the GAO report data alluded, farm program payment dollars are already disproportionately going to general partnerships. With additional exemptions, more payments are going to be directed toward our largest and wealthiest producers. If these provisions are not removed from the draft, our upcoming farm bill is shaping up to support big agriculture at the expense of our small and beginning farmers and ranchers.
Farm program payments to big agriculture contradict support for beginning farmers and ranchers
While the data outlined in the GAO report shed light on the distribution of payments, we have profound concerns regarding the implications that come as a result of those payments. As a result of unlimited payments, the largest and wealthiest farming operations continue to grow, while beginning and small farmers struggle to compete. A $3.7 million payout to a farming operation comprised of two individuals and 32 corporations is a far cry from, at most, a $125,000 or $250,000 payment that a small farm might receive. Support for these large farming operations works against many other USDA programs, such as beginning farmer loans, rural development programs, and more. The positive impact from those programs is diminished when corporate agriculture is strengthened by excessive and unnecessary farm program payments.
Taxpayer dollars should not be misguided to further drive farm consolidation, increase barriers for beginning farmers, and decrease the number of family farms in our agricultural system. Instead, sound and effective payment limitations should be implemented and enforced to ensure taxpayer dollars aren’t funding the squandering of rural America.