On March 24, 2015, USDA announced a proposed rule that further restricts farm program payments to those persons who are actively engaged in farming. USDA’s proposed rule is the result of the 2014 Farm Bill; it seeks to limit the number of individuals who previously qualified for farm program payments based solely on providing management to the farm operation rather than labor. This article reviews the proposed regulation in light of the public comment period which allows anyone to submit comments on the proposed rule by May 26, 2015. (Note: a version of this article is also available at farmdoc Daily).
Background
Requiring a person be actively engaged in farming to receive federal farm payments was a reform introduced by the House Agricultural Committee as part of the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203, passed Dec. 22, 1987). It was intended to address “methods to legally circumvent” payment limitations and “schemes [that] have been developed that allow passive investors to qualify for benefits intended for legitimate farming operations.” (H. Rept. 100-391 (Oct. 26, 1987), pg. 14-16); H.R. 3545). A General Accounting Office report at the time had highlighted the issue and Congress responded by prohibiting payments to anyone not considered actively engaged in farming.
Under the current statute and regulation, a person can qualify for farm program payments if they are actively engaged in farming, which means they have made a significant contribution of both: (1) capital, equipment, or land; and (2) personal labor or active personal management. The controversy debated for this farm bill is similar to the one raised in 1987: passive investors are able to collect payments intended for farmers by claiming to provide management to the farm (in addition to capital, equipment, or land). Farms that are organized as general partnerships or joint ventures are permitted to increase total payments to the farm entity for each additional person added to the operation. This has led to concerns about whether the management requirement was failing to properly limit program payments.
The issue was part of the 2014 Farm Bill debate. Both the 2012 and 2013 Senate versions of the farm bill sought to strike the phrase “active personal management” and limit additional payments to only a single farm manager in an operation. The same provision was added during debate on the House floor as part of an amendment that passed by a vote of 230 to 194. As reported at the time, this was among the final and most difficult issues to resolve in the conference negotiations between the House and Senate (see here, here, here and here). The final conference compromise directed USDA to address the issue. First, USDA was required to write regulations to define the term “significant contribution of active personal management” for the actively engaged in farming eligibility requirement. Second, USDA was given the authority to limit the number of persons qualifying for payments as a farm manager. USDA was not, however, permitted to apply the regulation to farms consisting entirely of family members. USDA has published the proposed regulation in response.
Before undertaking further discussion (and in the interests of full disclosure), I want to acknowledge my involvement with this issue. I served on the Senate Agriculture Committee staff for then-Chairwoman U.S. Senator Debbie Stabenow during the 2014 Farm Bill debate. I also served as Administrator of the Farm Service during implementation of the 2008 Farm Bill. The issue arose during that process as well, however, no proposed or final regulation on it was published.
Discussion of the Proposal
Toward the end of the farm bill debate, the U.S. Government Accountability Office (GAO) produced a report which highlighted concerns with the current statute and regulation, concluding that revisions were needed to the actively engaged in farming eligibility requirement. This report provides context to the farm bill debate and USDA’s proposed changes. GAO focused on how general partnerships use managers to collect additional farm program payments. For example, GAO found that general partnerships constituted roughly 27 percent of all entities receiving payments in 2012 but collected over 49 percent of the total payments. Moreover, GAO found that general partnerships received 97 percent of their total farm program payments through managers, either alone (27 percent) or in combination with labor (70 percent). By comparison, general partnerships received only 3 percent of their total farm payments due to persons contributing only labor to the farm. In other words, these entities are getting the bulk of their farm program payments by adding managers to the farm. GAO also provided specific examples to demonstrate usage of the rule (see page 35 of the report) as did Senator Grassley in a 2014 Farm Bill implementation hearing on May 7, 2014 (available here, beginning at 1 hour 30 minutes). The top three are summarized here:
- A farm in Louisiana had 22 members (all of them Limited Liability Companies) with 16 of the members qualifying for payments as managers. The farm operation received $651,910 in federal payments in 2012.
- A farm in Arkansas had 26 members (all corporations) with 6 members qualifying for payments as managers only and 15 qualifying through a combination of management and labor. The farm received $582,876 in federal payments in 2012.
- A farm in Mississippi had 11 members, 6 of them qualifying for payments as managers. The farm received $440,000 in federal payments in 2012.
The proposed rule would add eligibility requirements for farms seeking to qualify multiple managers for farm program payments. The new requirements would not apply to farm operations that consist entirely of family members. Existing provisions for landowners who share in the risk of a crop and for spouses are also not altered by the proposed rule. If the farm operation contains any non-family members then it can only have one person qualify for farm program payments as a manager under the existing rules. Any additional person seeking to qualify for payments as a manager must meet the new requirements.
The proposed regulation defines “active personal management” to mean those items critical to the profitability of the farming operation. It divides management activities into categories of farm capital, labor, agronomics, and marketing. Only significant contributions count, meaning a person must perform such activities on a “regular, continuous and substantial basis” consisting of either 25 percent of the total management hours required by the farm operation or at least 500 hours annually. These requirements, however, appear not to apply to the first farm manager in the operation.
No farming operation may qualify more than three persons for payments as managers and an operation can have one manager qualify under existing requirements. If the farming operation seeks to qualify more than one person as a manager, then each such person is required to keep records or logs of their activities. Qualifying additional managers is not automatic. A farm must be considered large (producing crops from more than 2,500 acres, honey from 10,000 hives or wool from 3,500 ewes) to qualify one additional person for payments as a manager. A farm claiming to be complex may seek to qualify one additional person for payments as a manager. Complexity will be determined by the number and type of livestock, crops or other agricultural products and the geographical area covered. FSA state committees must agree that a farm is complex. State committees are also given authority to adjust the requirements by 15 percent if they determined that the relative size of farming operations in the state requires it. If a farm operation seeks to qualify the maximum three persons for payments as managers, it must be both large and complex.
The proposed regulation only applies to general partnerships and joint ventures because only those entities can increase payments by adding people. For example, a general partnership with two partners can receive a total of $250,000 ($125,000 per partner). If the general partnership adds another partner who is considered actively engaged the total limit for the entity increases to $375,000. The proposed regulation is not expected to impact corporate or Limited Liability Corporations (LLCs) entities because they cannot increase payments in this fashion. Corporations and LLCs are subject to a single payment limit per entity ($125,000 under the 2014 Farm Bill) without regard to the number of shareholders or members in the farming entity. This distinction is based on the statute that provides an exception for general partnerships and joint entities from the general limit; payments to these entities may not exceed the payment limit multiplied by the number of persons and legal entities constituting the general partnership or joint venture. (7 U.S.C. §1308(e)(3)(B)).
Discussion of Remaining Issues
By limiting the use of farm managers to multiply payments, the proposed changes appear to address many of the concerns with the current rules. It is part of a long debate about the validity of allowing farms to use passive investors or managers to collect additional federal farm program payments. USDA’s proposed changes to the regulation seek to address many of the concerns with the current rules but are unlikely to end the discussion. The debate generally involves concerns about preserving the integrity of farm programs as well as making room for different sizes and types of farms given the breadth and depth of diversity in American agriculture. The following discussion focuses on five remaining issues for consideration.
- Differential treatment of entities.
Differential treatment of entities is based on the statute and may require an act of Congress to change. Given the strong concerns surrounding the issue, however, continuing to perpetuate this treatment at least raises a question for consideration. As discussed above, the statute provides an exception for general partnerships and joint entities from the general one payment per entity limit. It does not explicitly require they receive additional payments. It states that payments for general partnerships and joint ventures “shall not exceed” the payment limit multiplied by the number of persons and legal entities. Arguably, this creates an upper limit but not an explicit requirement that these entities receive multiple payments. (7 U.S.C. §1308(e)(3)(B)). At best it is an open question under the statute. USDA may have discretion to set the limit lower than the statutorily-prescribed maximum. In reality (and politically) it is difficult to imagine that USDA will make full use of such discretion if it exists.
- Differential treatment for farm managers.
Under the proposed rule, the first manager in a farm operation appears to be treated different than the second and third managers. Any confusion is found in the fact that the new requirements do not apply to farming operations seeking to qualify only one person “as making a significant contribution of active personal management” for program payments. That specific term, however, has been redefined in the proposed regulation to include the new requirements. This is an area that could use clarification in the final rule.
If USDA intends to treat managers differently it should provide justification. The 2014 Farm Bill explicitly directed USDA to define “significant contribution of active personal management” for purposes of payment limits and eligibility; the only farms exempted are those consisting entirely of family members. The farm bill does not provide an exception or exemption for the first manager. The argument here would be that if a person needs to be making real contributions to the farm in order to receive a payment that should apply to the first manager and not just the additional managers. This also applies to the recordkeeping requirements discussed below.
- Mandatory reporting by all managers.
In addition to reconsidering treating all farm managers the same, USDA might also want to consider whether the recordkeeping requirement should come with a reporting requirement. The rule mandates recordkeeping for any farm seeking more than one manager but does not require that those records be reported to USDA. It does, however, require that they be made available upon request for review. The long-standing concerns surrounding this issue would seem to counsel that USDA might consider requiring that these records (or some version of them) be reported in order to ensure compliance. It might also consider applying the requirement to all farm managers seeking payments.
- USDA paperwork considered active personal management activity.
In the categories listed as active personal management activities, USDA has included managing insurance and participation in USDA programs. Because a person need contribute only one of the categories of activities to qualify, it appears possible that filling out USDA program paperwork could qualify a person for payments as a manager. Arguably, completing farm program (or even crop insurance) paperwork should not be significant enough to qualify a person for payments. USDA might consider either removing these activities or consolidating and combining them so that they alone cannot qualify a person for farm program benefits.
- Additional managers for size and complexity.
The 2014 Farm Bill requires USDA to consider the size, nature and management requirements of each type of farm operation. It also requires consideration of the changing nature of farm management and the degree to which changes will “adversely impact the long term viability of the farming operation.” (P.L. 113-333, §1604). USDA is to consider these matters in writing the regulation but nothing in the statute requires USDA to permit farms to increase payments for additional managers. The statute also does not require USDA to give authority for expanding the size and complexity requirements in states that consider their farms too large and complex. The historical baggage carried by this issue begs the question. Some farms may require a manager or multiple managers but that does not in itself justify collecting additional farm program payments. One solution would be to eliminate the size and complexity provisions along with the ability to add one or two managers for program benefit purposes.
Conclusion
As noted above, I have had active personal involvement in the debate; that involvement was on the side supporting reductions in the number of farm managers that could receive payments. For what it is worth, I also happen to personally agree. My view is shaped by concerns about farm program integrity and fairness. The farms taking advantage of the current rule are few but the farmers who benefit from the safety net are many and, admittedly, include my own family. Opponents of the proposed changes may want to consider how their position impacts everyone.
Experience with this issue teaches that any dust kicked up in defense of the status quo is likely meant to obscure. Whether a farm needs multiple managers is beside the point; nothing in the proposed rule would prevent any farm from adding as many managers as it felt necessary. The relevant question is whether federal farm payments should multiply for some farm entities because they add managers to the operation. Size and complexity appear to be thin reeds upon which to balance additional payments — too often complexity has been for the sake of payments not farming. It is hard to square arguments against the proposed changes with common sense about modern row-crop agriculture.
The remaining issues with the proposed rule should not detract from the fact that it is no small accomplishment given substantial opposition by certain influential agricultural interests. The debate will continue. Opponents are expected to push for significant changes in the final rule. Supporters of the principles behind this proposal might question whether USDA has gone far enough but should also appreciate the progress embodied in it. Everyone has until May 26, 2015, to submit comments about the proposed regulation to USDA and they can be submitted online at http://www.regulations.gov.