Farm and Commodity Policy: Program Provisions: Direct Payments

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Direct payments are available to producers with eligible historical production of wheat, corn, grain sorghum, barley, oats, upland cotton, rice, soybeans, other oilseeds, and peanuts. The program is administered by USDA's Farm Service Agency (FSA). Under the 2008 Farm Act, direct payments are reduced by 20 percent for producers who elect to participate in the Average Crop Revenue Election (ACRE) Program.

Program Overview

For crop years (CY) 2008-12, producers enroll annually in the program to receive payments based on the respective producer's historical program payment acres and yields and payment rates specified in the 2008 Farm Act.

A direct payment is equal to the product of the payment rate for the specific crop, the historical payment acres (85 percent of base acres in CYs 2008 and 2012 and 83.3 percent in CYs 2009-11), and the historical payment yield for the farm. For example, the payment for corn base is:

DP_corn = (Payment rate)_corn x (Payment yield)_corn x (Payment acres)_corn

Where (Payment acres)_corn = (Base acres)_corn x (85% in CY 2008 and CY 2012 and 83.3% in CY 2009-11)

Base acres and payment yields are unchanged from those specified in the 2002 Farm Act. If the Secretary of Agriculture designates any new oilseeds, base acres and payment yields will be established in a manner similar to the provisions used for minor oilseeds in the 2002 Act.

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(s), except for some limitations on planting fruits, vegetables, and wild rice. The land must be kept in agricultural uses (which includes fallow), and farmers must comply with certain conservation and wetland provisions. A pilot project has been developed for certain States to permit the planting of cucumbers, green peas, lima beans, pumpkins, snap beans, sweet corn, and tomatoes grown for processing on base acres during each of the 2009-12 crop years.

Direct payment rates are unchanged from the 2002 Farm Act. However, the direct payment rate is reduced by 20 percent for producers electing to enroll in the ACRE program.

Direct payments for the 2008 crop were to be made as soon as practicable after enactment of the 2008 Farm Act. For CY 2009-12, payments are to be made no sooner than October 1 of each crop year. Advance payments of up to 22 percent can be made beginning December 1 of the preceding calendar year for each CY 2008-11. Advance payments are not available for CY 2012.

The payment limit on direct payments is $40,000 per person per crop year for producers not participating in ACRE. The three-entity rule is repealed. Payments are attributed directly to the individual. Spouses qualify separately for payments. Producers with adjusted nonfarm gross income of over $500,000 averaged over 3 years or with adjusted farm gross income of over $750,000 averaged over 3 years are not eligible for direct payments. For more information, see Payment Limitations.

Economic Implications

Fixed direct payments are not tied to current production or prices and do not require any commodity production on the land. With planting flexibility, farmers are not confined to growing the historically produced crops for which they are receiving direct payments. They could receive a payment based on historical corn acreage, for example, but plant soybeans on those acres. Thus, farmers' planting decisions will be based on expected market prices and variable costs of production.

On a per acre basis, the value of direct payments varies by the commodity associated with the historic base and by payment yields, which vary by location. Since payment rates and yields are unchanged from the 2002 Act, the impacts of the distributions of payments per acre and region are likely representative of the impacts under the 2008 Farm Act.

The primary economic impacts of direct payments are increases in farm income and land values. However, since direct payments also increase producer wealth, they could facilitate additional investment and may influence a farmer's risk aversion. If so, direct payments could indirectly affect crop production decisions overall, but are not likely to affect decisions about a specific crop mix. Research indicates that any impacts on production would likely be small.

For More Information...

• Sector Analyses section of the Recommended Readings