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Farm size at center of payment limit issue

How big a farmer would you have to be to feel the impact of the Grassley/Dorgan amendment?

That's the question being asked by thousands of farmers as members of a House-Senate conference committee begin negotiations on whether the payment limit amendment and other similarly controversial provisions remain in the 2002 farm bill.

The answer? Well, it depends on a number of factors, including a grower's mix of crops, what happens with other commodity provisions in the House and Senate versions of the bill and actual prices.

“It's hard to figure out exactly what is going to happen,” says Mark Lange, the National Cotton Council's vice president for policy analysis and program coordinator who discussed the potential impact of the amendment during a presentation at the USDA Outlook Forum in Washington.

Lange says it appears the Grassley/Dorgan amendment, named for its principal authors, Sens. Charles Grassley of Iowa and Byron Dorgan of North Dakota, would do the following:

  • Eliminate the three-entity rule, which allows producers to receive a full payment on one farm entity and share the payments in two others.

  • Apply means testing to the entities (producers cannot have earned more than $2.5 million in any of the past three years).

  • Put a $75,000 limit on fixed and counter-cyclical payments (Agricultural Marketing Transition Act or AMTA and target price or target revenue payments).

  • Retains the $150,000 marketing loan gain payment limit.

  • Increases the combined $225,000 payment by $50,000 if a farmer's wife participates in the farming operation.

  • Converts nonrecourse loans to recourse loans when the farmer hits the marketing loan payment limit ceiling.

“The amendment says that as soon as you hit the limit for marketing loan gains, there are no certificates, and it's a recourse loan,” said Lange, referring to CCC loans in which the collateral cannot be forfeited to the government.

“What that tells me is that a cotton producer has to look at the acres he has in his mix of crops and figure out the acres covered by the marketing loan. Then, he has to look very carefully at whether he plants one more acre of cotton because any cotton he produces beyond the marketing loan, he's looking at 35 cents (based on Feb. 22 New York futures).”

If a grower is producing 1,000 pounds of lint per acre, which is considerably above the U.S. average, Lange notes, “that says he has to have production costs of less than $350 per acre on those additional bales. Nobody that I know of has those kinds of costs unless he's just dusting the crop in and praying for a rain.”

A farmer can produce 2,003 bales before he hits the $125,000 limit for a husband and wife on fixed or AMTA and counter-cyclical payments in the Senate bill, which has an initial AMTA payment of 13 cents per pound. (That is, 2003 bales × 13 cents × 480 pounds = $124,987.)

“But the one I think is more important is the limit on loan deficiency payments,” he said. “If the loan deficiency payment falls to 20 cents — and that may be optimistic, it could be bigger than that — 1,562 bales of cotton, and you're done. That 1,563rd bale sells for 35 cents per pound, and that's all you get.”

Growers in some regions would reach the new limit faster than those in others based on differences in average yields, he noted. In the Mid-South, a grower would reach the limit for the fixed 13-cent payment with 1,439 acres and the 20-cent marketing loan payment at only 1,000 acres.

In the Southeast, it would take 1,468 acres to reach the 13-cent fixed payment limit and 1,153 for the 20-cent marketing loan limit; in the Southwest, 2,279 acres for the 13-cent fixed limit and 1,875 acres for the marketing loan; and in the West, 874 acres for the fixed 13-cent limit and 615 for the 20-cent marketing loan limit.

“Now, the bulk of production in the Mid-South comes off operations that have significantly more than 1,000 acres of cotton,” said Lange. “The bulk of production in the Southwest comes off farms that are right around 1,800 acres. The bulk of the production in the Far West comes off enterprises that are much larger than 600 acres.

“So, a lot of production in the Mid-South and Far West is located on acres that won't be covered by the marketing loan due to the new attribution requirement in the Grassley amendment.”

The Congressional Research Service, which has conducted a study of the impact of both the House and Senate bills on payment limitations, says that a farmer would only have to grow 881 acres of cotton to reach the new “fixed, decoupled and counter-cyclical payment limit under the Grassley amendment compared to 1,470 acres under the House-passed farm bill.

If his spouse qualifies for a payment under the Senate bill, he could grow 1,321 acres before hitting the expanded limit. Under the three-entity language in the House bill, he could grow 2,940 acres before hitting the limit.

The Congressional Research Service study apparently assumes a national average yield and the payment provisions in the two versions. It also says that it would take a 36-cent adjusted world price or AWP to reach the marketing loan limit under the House bill and a 29-cent AWP under the Senate bill. Subtracting the AWP from the marketing loan rate gives you the marketing loan gain for cotton of average grade and staple.

For rice, the CRS study says it would take 930 acres for producers to reach the fixed, decoupled and counter-cyclical payment limit under the House bill and 881 acres under the Senate's Grassley amendment. For a husband and wife, it would be 1,860 acres for the House bill and 731 acres for the Senate.

It would require a $3.87 AWP to reach the marketing loan gain limit for the House bill and a $1.83 AWP under the Senate version.

Responding to a question following his presentation, Lange said he believes that passage of the Grassley amendment in the final farm bill would lead growers in California to cut their cotton acreage in half. “Most of those acres would go to grain and to crops like tomatoes and garlic,” he noted.

In the Mid-South, farmers would reduce their cotton acreage by at least 25 percent with the acres being split 50-50 between corn and soybeans, he said. In the Southeast, the reduction would range from 15 to 20 percent with the shifted acres evenly divided between corn and soybeans.

“The ones that would really get hurt would be those with cotton and peanuts in the Southeast,” he said. “It wouldn't take a combination of many of those acres to hit the new payment limits.”

Lange says he would expect only a minimal impact on cotton acres in the Southwest because of the generally lower yields in those areas.

“I think it's a difficult time for cotton farmers in the Mid-South and Far West to figure out what to do,” he said. “I think they just have to wait and see what this conference package ends up being.

“I have to tell you that the uncertainty and the anxiety that exists in the U.S. cotton production sector right now is probably greater than anything certainly in my experience with cotton and in that of those who have been involved with this industry much longer than I have.”

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