Understanding direct payments on the farm
Direct payments to farmers under the current farm bill have been a small, but stable and important part of farmers' income. These direct payments are cut in the draft farm bill from the Agriculture Committee of the U.S. Senate.
In the last few years, those direct payments have been essentially the only government payments made to farmers on the basis of their crop acreage. Crop prices have been higher than the levels that would create payments under the counter-cyclical and Average Crop Revenue Election (ACRE) programs.
Based on the Minnesota farms in the FINBIN sample at the University of Minnesota, direct payments have been a fairly stable source of income for farmers: a five-year average of $13,044 for all farms in the sample and $17,980 for crop farmers. For all farms, the highest average payment was $13,873 per farm in 2010; the lowest was $12,399 per farm in 2011.
These direct payments have been a small part of gross cash farm income: 2 percent over the past five years for all of these farms and 2.8 percent for crop farmers. However, direct payments have been an important part of net farm income: 8.8 percent for all farms and 9.8 percent for crop farmers. These percentages have declined slightly over the past five years except for 2009 which was a low-income year for farmers. For crop farmers, direct payments as a percentage of net farm income ranged from a low of 7.7 percent in 2011 to a high of 19.1 percent in 2009.
Direct payments are a fixed payment in contrast to counter-cyclical payments that vary with price levels, and ACRE payments which vary with price and yield levels. The policy draft from the committee replaces these three payment systems with a new program called Agriculture Risk Coverage (ARC) and expanded insurance subsidies. These proposals will move federal farm support into more of a risk management program with coverage levels moving with changes in yields and market prices over a moving five year time frame.
Kent Olson is an economist with University of Minnesota Extension.