farmgate: Direct Payments: Beneficial? Vulnerable?
The leadership of the US Senate Agriculture Committee has delayed consideration of the 2007 Farm Bill until funds can be earmarked for conservation and disaster aid programs that are beyond the scope of what has been approved by the House of Representatives. At midweek the word on Capitol Hill was that Direct Payments to commodity producers would be diverted into the conservation and disaster aid programs, which drew considerable criticism from some farm groups. Cornbelt farmers have been receiving Direct Payments, but what are they based on?
Unlike Counter-cyclical payments and Loan Deficiency Payments, eligible farmers receive Direct Payments for the same amount, year after year. Ohio State University ag economist Carl Zulauf writes in a July 2007 newsletter that Direct Payments never vary because of commodity prices. Their origin is in the 1996 Farm Bill and were originally known as payments for Production Flexibility Contracts and were provided to producers of the program commodities. In 2002 they became Direct Payments and were extended to soybeans as well. Congress has been appropriating $5.3 billion per year for Direct Payments, which is close to what Senate Agriculture Committee Chairman Tom Harkin is wanting for additional Farm Bill funding.
The nature of the Direct Payments makes them a major focal point in the negotiations over the World Trade Organization rules. Since the Direct Payment is not tied to production, and cannot promote additional production, they are considered to be safe from the WTO’s proposed spending limits. Such a payment is considered to be a social income transfer instead of a production subsidy, so it has the WTO’s blessing.
The Direct Payments were originally calculated with a production factor, so they are paid on bushels, pounds, and hundredweight of production. Zulauf says the Direct Payment is calculated by multiplying a farm’s program yield (1981-85 yields) by the farm’s base acres (also 1981-85) and then multiplied by 85%. Once that bushel value is determined, it is then multiplied by a Direct Payment rate. Corn receives a 28 cent per bushel payment, soybeans are 44 cents per bushel, and wheat is 52 cents per bushel.
Zulauf says Direct Payments have been guaranteed, which is appreciated by bankers, but do not help manage price or revenue risk. Recent practice for cash rent producers has been to agree to higher rents because of the Direct Payments, in essence turning them over to a landowner. Direct Payments do provide certain cash flow that can be used for operating expenses, but depending upon the crop, can vary widely. Zulauf says the effective benefit of Direct Payments varies from $95 per acre for a rice farmer to $1 per acre for oats.
Summary:
While Direct Payments have been a relatively minor part of the recent farm program, they do provide cash flow and they are compliant with the World Trade Organization rules. Direct Payments provide a more than $5 billion benefit to commodity producers, and because of the high value, may be vulnerable for a shift into programs that may be of a higher priority for Members of Congress.
Posted by Stu Ellis on September 27, 2007 12:33 AM to farmgate