Commodity groups are weighing in on payment limitation proposals, and they are not mincing their words of disapproval.
“Reduced government payments translate into lower net farm income for the U.S. agricultural economy, with the vast majority of reduced income shouldered by producers in the Sun Belt,” notes a March 24 letter from the National Cotton Council, USA Rice Federation and U.S. Rice Producers Association, the commodity groups united in their response to a request for comments from USDA's Payment Limit Commission.
“Any further payment limit restrictions would obviously impact farm income as government payments are denied. In recent years, with low prices and declining market income, farm program benefits have accounted for fully one-third of gross income for program crops,” the letter states. “In the Mid-South, proposed limitations could leave a significant number of cotton and rice acres ineligible for loans. A significant percentage of those acres would shift to production of soybeans or corn because the proposed limits would cover more acres of crops with significantly lower cost of production.”
At prices comparable to those of the recent past, per-acre payments to cotton growers cover about 40 percent of cash costs, while corn payments — though less in actual dollars — would cover almost 50 percent of cash costs, according to the groups representing the U.S. cotton and rice industries.
If market prices are not sufficient to encourage crop production, they say, the loss of loan eligibility will cause some acres to leave crop production, while others shift into other crops. Farms may also be broken into smaller units to insure program eligibility, which would increase inefficiencies due to the inability to capitalize on economies of scale.
An analysis by the Food and Agricultural Policy Research Institute indicates that further payment limits would cause 1.5 million acres to move out of cotton and rice production. That shift in acreage could be even greater at today's market prices, and the potential is there, the commodity groups say, to alter production patterns by as much as 4 million acres.
“It is not unreasonable to expect that as much as 3 million acres could move out of cotton production and into other crops. Additional acres would also shift out of rice and peanuts,” the letter says. “In the case of cotton and rice, reduced acreage would offer support to prices, while corn and soybean prices would decline with increased plantings. Based on economic estimates, each 1 million acre decline in cotton acreage would increase average prices by approximately 2 cents per pound. An additional 1 million acres of corn or soybeans would tend to lower prices of those commodities by 3 and 15 cents, respectively.”
In addition, the cotton and rice groups contend that further payment limit restrictions will have a greater impact on Sun Belt agriculture due to the size of payments and the larger size of operations.
They say it is important to dispel the rumor that farms in the Sun Belt are larger simply because they have been “chasing government payments.” The move towards larger operations has instead been driven by capital, technology, gains from economies of scale, and federal tax policy.
“In addition, cotton producers, out of economic necessity, are significantly vertically integrated. Most producers have investments in ginning, warehousing and crushing operations. As with production efficiencies, these processing operations depend upon volume and economies of scale to be viable,” the letter states. “Restricting U.S. farmers and ranchers' access to agricultural assistance — whether by unilateral reduction or elimination of U.S. farm programs or by a more selective restriction through a reduction in payment limits — is counterproductive for U.S. farmers and consumers alike.”
Lowering payment limitations, the groups say, will transfer much of agriculture's infrastructure abroad and allow commodity prices to be dictated by foreign suppliers.
Farm program payments, the letter points out, are correlated with both the market value of a commodity and its production costs.
“The higher value, higher cost of production commodities tend to be those that also generate greater economic activity. By limiting the dollar amount of program crop benefits a farmer can receive, producers of the higher cost of production crops are confronted with the most consequential restrictions on benefits.
“Our organizations urge the Commission to recommend to Congress no changes in the current payment limits or eligibility. It is imperative that commercially viable operations have a stable farm policy and are eligible for program benefits in order to remain in business and provide competitively priced commodities for our domestic and overseas customers,” the letter says.
“With the majority of farm program benefits tied to prices, times of low prices would be when payment restrictions have their greatest impact since fewer acres would be required to hit the limit.”
In fact, the cotton and rice organizations say, there is no need for payment limitations because the farm bill already imposes detailed eligibility requirements for commodity program payments.
“A driving force behind the need for U.S. farm subsidies is the prevalence of similar, though often much larger, farm subsidy programs in other countries. Whereas existing WTO rules restrict U.S. spending for so-called “trade distorting” subsidies to $19.1 billion, the EU is permitted to spend up to $67 billion, Japan up to $30 billion and Canada up to $23 billion,” the letter says. “Global agricultural subsidies have the effect of “buying down” retail prices of agricultural products — reducing farm prices to levels that tend to be below the average worldwide cost of production.”