The Importance of Farm Program Payments to Farm
Households
Government payments are
a small share of income for most farms.
Robert
Hoppe
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Less
than half of all farms—43 percent—in
2005 received farm program payments.
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Large
family farms represent 8 percent of
all farms, but they received 58 percent
of commodity program payments going
to farms. |
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Two-thirds
of recipient farms received less than
$10,000 in payments, accounting for
only 7 percent of their gross cash farm
income. Payments represent 13 percent
of gross cash farm income for those
that receive more than $30,000 in payments.
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| This
article is drawn from . . . |
| The Farms
Receiving Government Payments chapter of the
ERS Briefing Room on Farm Income and Costs.
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| You
may also be interested in . . . |
| Structure
and Finances of U.S. Farms: Family Farm Report,
2007 Edition,
by Robert A. Hoppe, Penni Korb, Erik J. O’Donoghue,
and David E. Banker, EIB-24, USDA, Economic
Research Service, June 2007.
ERS
Briefing Room on Farm and Commodity Policy.
Growing
Farm Size and the Distribution of Farm Payments,
by James MacDonald, Robert Hoppe, and David
Banker, EB-6, USDA, Economic Research Service,
March 2006. |
From 2000 to 2005, the farm sector
received $112 billion in government payments (measured
in 2005 dollars) through an array of farm programs,
including direct payments, countercyclical payments,
loan deficiency payments, emergency payments, and
conservation payments. These payments provide income
support for eligible farm operators and farmland
owners, with eligibility and payment criteria varying
by program (see box, “Some
Farm Program Payments Vary More Than Others”).
While farm program payments go
to a variety of farm operators and owners for many
reasons, less than half of farm operators receive
any payments. And, of those that do, in most cases,
these payments are relatively modest. About 15 percent
of farm households received $10,000 or more in farm
program payments in 2005. Given the uneven distribution
of farm program payments and their variability over
time, what do we know about farm program payment
recipients and the importance of these payments
to their business operations and household well-being?
While program payments can have
sector-wide effects on land values and commodity
prices, and can directly affect many nonfarm-operator
households, such as nonoperator landlords, our primary
focus is on the characteristics of farms and farm
operator households receiving the payments. In 2005,
the average payment among farms receiving program
payments was $18,000, with large farm operations
(those with sales of $250,000 or more) receiving
an average of nearly $70,000. Nonetheless, this
may overstate the importance of program payments
to large farms and their operators for several reasons.
Farms receiving program payments
often lease a sizeable portion of the land they
operate and are more likely to have more than one
household involved in operating the farm. Payments
tied to the land are likely to accrue, directly
or indirectly, to the landowners given enough time
for rental rates to adjust. And even when the operators
own all the land they farm, having multiple households
involved in the operation dilutes the importance
of program payments to each individual operator.
Furthermore, program payments do not reflect the
added costs farm operations incur to receive payments
from many farm programs. Finally, the importance
of program payments to the farm household’s
well-being declines as nonfarm income grows. Most
operators and other household members of farms receiving
program payments have significant off-farm sources
of income, making income from farming and program
payments less important.
Large Farms Receive Most
Commodity-Related Payments
Most of the value of U.S. agricultural
production comes from large family farms. By contrast,
most U.S. farms are small family operations with
less than $250,000 in sales. Federal farm programs
do not explicitly target payments to farms of a
certain size or net income level, although caps
may apply to the size of the program payment a farm
or an individual farmer can receive. Nevertheless,
large farms are more likely to receive farm program
payments and, as a group, they receive the bulk
of payments simply because most payments are paid
per acre. Current payment limits affect a very small
percentage of farms (see box, “Data
Source and Farm Types”).
Three-quarters of large family
farms receive farm program payments, compared with
just over half of small commercial farms and a third
of residential/retirement farms. Large farms’
high participation rate reflects their heavy enrollment
in commodity-related programs that are targeted
at current or past production of commodities. In
contrast, smaller farms are most likely to specialize
in cattle, particularly cow/calf operations, and
in other commodities which are generally ineligible
for commodity-related payments. Despite a higher
percentage of large family farms receiving farm
program payments, however, most of the farms receiving
farm program payments are small, reflecting the
91-percent share of farms in the two small-farm
groups.
The distribution of commodity-related
payments corresponds to the production of program
commodities (in terms of market value). For example,
58 percent of commodity-related payments go to large
family farms which, as a group, produce 61 percent
of program crops. Commodity-related payments are
also heavily concentrated geographically. Farms
in the Heartland receive about 42 percent of commodity
payments, which is in line with the region’s
50-percent share of production of program crops.
Residential/retirement farms comprise
nearly two-thirds of all farms and receive about
half of all conservation payments. Given that the
CRP accounts for 82 percent of conservation payments
and is paid on a per acre basis, it may be surprising
at first glance that residential/retirement farms—with
their small average acreage—account for half
of all conservation payments. Even though they have
small acreages, participating residential/ retirement
farms enroll larger shares of their land in CRP
than other program participants. For example, CRP
enrollments account for 47 percent of the land operated
on participating residential/ retirement farms,
compared with only 6 percent on participating large
family farms. Large-farm operators likely enroll
such a small share of their land in the CRP because
the opportunity cost of removing their land from
production is high, except on the most environmentally
sensitive land.
Limited Contribution to
the Bottom Line
Farm income is more variable than
the wage and salary income relied upon by the typical
U.S. household. One of the functions of farm program
payments is to provide a cushion to income variability
over time; indeed, some payments are designed mainly
for that purpose. How important are farm program
payments to the overall financial position and income
stability of farm operator households? The short
answer—it depends, but for most farm operator
households, farm program payments account for a
relatively small share of cash receipts and play
only a minor role in smoothing out the effect of
variable farm incomes on farm household well-being.
The majority of farm operator
households operate farms that do not receive farm
program payments, and for most of those that do
receive program payments, those payments total less
than $10,000. To put this into perspective, the
average off-farm income of the 85 percent of farm
households receiving no program payments or less
than $10,000 in payments is roughly $70,000 and
the average household net worth is over $700,000.
Therefore, off-farm income and accumulated household
wealth play a much larger role in maintaining farm
household income and reducing the effects of year-to-year
variability in farm income than farm program payments
for most farm households.
Of course, not all farms are close
to “average.” Fifteen percent of farms
received $10,000 or more in farm program payments
in 2005. This group included a mix of all types
of farms, but payments tended to increase in tandem
with farm sales—most of the farms receiving
$30,000 or more in payments were large family farms.
For this last group of high-payment farms, the average
payment was $76,900. This is four times the average
payment of all farms receiving payments in 2005.
When the cost of participating in farm programs
is considered, however, the importance of farm payments
to the well-being of even these high-payment farm
households is likely to be overstated.
| Only
15 percent of farm households operated farms
that received more than $10,000 in farm program
payments in 2005 |
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Payment level for farm operated—
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| Item |
No payments |
Low (less than
$10,000) |
Medium
($10,000 to
$29,999) |
High
($30,000
or more)
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All farm households |
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| Number of operator households |
1,174,578 |
576,931 |
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Dollars
per household |
| Average farm household income |
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83,464 |
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From farming
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From off-farm sources
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| Average household net worth |
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Dollars
per farm receiving payments |
| Average farm program payment |
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Percent
of operator households that… |
| Share income with another household |
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= Not applicable.
Note: Excludes nonfamily farms. Household
income and net worth are not estimated for
nonfamily farms.
Source: USDA, ERS,
2005 Agricultural Resource Management Survey,
Phase III. |
Unlike unemployment insurance or
Social Security, farm program payments do not always
translate dollar-for-dollar into household income
for three reasons. First, receipt of some farm program
payments may require that producers incur additional
farm expenses or forego commodity income. This is
the case with the CRP, for example, where producers
must set aside land for conservation to be eligible
for payments. The payment is not “on top”
of receipts from the sale of commodities but replaces
commodity sales. In effect, CRP participants provide
environmental benefits for society instead of crops
for the marketplace. Other conservation program
payments reimburse the farmer for part of the cost
of adopting conservation farming techniques, so
receipt of payments may actually reflect a net loss
to the farm business. The receipt of some commodity
program payments is only possible if the farmer
grows a crop, so higher payments require higher
input costs. The only payments that add dollar-for-dollar
to the bottom line of the business are direct payments
which, in 2005, amounted to roughly 21 percent of
total payments.
Second, large farms are more likely
to lease the land they operate. Fifty percent of
farms receiving program payments rented at least
part of the land they operated, with larger farms
leasing more often and leasing a higher percentage
of their operations. In comparison, 30 percent of
farms not receiving program payments lease land.
While the extent to which farm programs are capitalized
into land values and lead to higher rental rates
is uncertain, it is likely that some of the payments
pass through to nonoperator landlords. Thus, even
for direct payments, the farm operator household
likely benefits less than dollar-for-dollar.
Third, net income from large farms
is more likely to be shared among multiple households
than net income from smaller farms. This means that
if households operating large farms participate
in government farm programs, they are more likely
to share the government payments, too, reducing
the proportion of each household’s income
attributed to government payments. Fourteen percent
of households operating large farms that receive
government payments reported sharing income with
other households, compared with only 3 percent for
all farm households. The presence of multiple households
begs the questions of how financial management decisions
are made and what role government payments play
in that context. These questions are yet to be fully
understood but do seem to suggest a diminishing
role for government payments within this larger
financial context.
These measurement issues are difficult
to adjust for, but by focusing on the size of farm
program payments relative to gross cash farm income,
researchers can get a better picture of the relative
importance of payments to recipient households.
Most farm households received less than $10,000
in payments, with the average for this group being
slightly over $3,000. Payments for this group averaged
7 percent of gross cash farm income. At the other
extreme, for farms receiving more than $30,000 in
program payments, these payments represented 13
percent of gross cash farm income on average.
Averages can be deceiving, since
there are farms for which program payments represent
a larger share of receipts, and their numbers change
from year to year. But considering that government
payments to the farm sector were at a high level
($24.3 billion in 2005), and that the sector’s
gross value of production was fairly typical of
recent years, the well-being of relatively few farm
operator households appears to be dependent on program
payments.
Most farms—57 percent—do
not receive farm program payments, although payments
affect all farms indirectly by their influence on
markets (e.g., commodity prices, land values and
rents). On the other hand, since about 95 percent
of the income for nonparticipating farm households
comes from off-farm sources, these households are
directly affected by general economic and tax policies.
In fact, given the importance of off-farm income
to most farm households, economic policies affecting
the local economy are important regardless of participation
in farm programs.
| Some
Farm Program Payments Vary More Than Others |
| Payments
are made through numerous government farm
programs, each with its own goals and eligibility
criteria. Payment programs also vary in the
method used to determine the dollar value
of disbursements. The actual distribution
of payments to farms in any year is the result
of the combination of the eligibility criteria,
payment calculation methods of the programs
working in tandem with market and weather
conditions, and production and management
choices of individual operators.
Commodity direct payments
have ranged between $4 billion and $7 billion
since 1999. These payments are based on a
producer’s historic acreage and yield
of a particular commodity, not on current
production or prices. To be eligible for direct
payments, a farm must have an official historical
record of base acreage and program yield for
wheat, feed grains, rice, cotton, or oilseeds.
Direct payments—and the production flexibility
contract payments (PFCs) that preceded them—are
relatively stable over time because they are
not based on current production or prices.
Countercyclical payments,
which accounted for another large share of
all payments in 2005, are paid on the same
base acreage and program yields as direct
payments, but are linked to current market
prices. In contrast, loan deficiency payments
(LDPs) and marketing loans are fully linked
to both current production and market prices
because they are paid on total production
of the commodity. Because these programs are
linked to market conditions, their annual
disbursements are highly variable. In 2005,
LDPs and marketing loans accounted for 39
percent of total payments.
Emergency payments are the
most variable among the farm programs. For
example, crop failures due to weather conditions
helped push emergency payments to $9.7 billion
(37 percent of total payments) in 2000. In
contrast, emergency payments amounted to $0.6
billion (5 percent of total payments) in 2004.
In some years, emergency payments can significantly
increase the number of farms receiving payments,
especially if the distressed farms produce
commodities like beef cattle and specialty
crops not otherwise covered by a program.
Payments from the largest
conservation program, the Conservation Reserve
Program (CRP), are relatively stable. The
most common type of CRP payment arrangement
is a 10-year fixed annual rental rate. The
CRP pays landowners rent for taking land out
of production and engaging in conserving uses.
The CRP is voluntary, but receipt of CRP payments
is based on a competition to supply the greatest
environmental value to the public from the
land put in conserving uses.
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Data
Source and Farm Types |
Data from the Agricultural
Resource Management Survey (ARMS) offer significant
advantages when addressing questions of how
farm program payments are distributed among
farms because the survey can identify both
participating and nonparticipating farms.
Unlike other data sources. ARMS also provides
detailed information on the farms’ financial
and production characteristics in conjunction
with the characteristics of farm operators
and their households. Since ARMS contacts
only farm operators, however, analysis based
on ARMS data examines the distribution of
farm program payments that actually go to
farms during a calendar year. It excludes
the payments made to people who do not farm,
mainly nonoperator landlords.
Most of the data reported
here are from the 2005 ARMS. Data are reported
by farm type, which reflects the organization
and sales class of the farm and the principal
occupation of the farm operator, as follows:
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