March 25, 2015
TO COMMENT ON THE PROPOSED RULE VISIT THE CENTER FOR A LIVABLE FUTURE’S COMMENT PAGE!
On March 24, the United States Department of Agriculture released its proposed “actively engaged in farming” rule defining eligibility for the receipt of farm commodity subsidies.
Overall the proposed rule fails to implement anything remotely resembling the real farm subsidy reform that bipartisan majorities in the House and Senate approved during debate on the 2014 Farm Bill. That democratically arrived at farm bill reform language was ultimately stripped out of the final farm bill in the backroom negotiations between the House and Senate Agriculture Committee leadership in favor of much higher per-farm subsidy caps and no closing of the loopholes in current regulations that allow even the largest farms in the country to avoid the limits altogether.
To read more about what happened to farm payment limits in the 2014 Farm Bill see NSAC’s 2014 Farm Bill Subsidy Reform and Fair Competition Drill Down.
As part of the backroom negotiation, the pro-reform forces did at least create an opening for USDA to close the loopholes on their own. It was that opening that USDA responded to this week.
Specifically, the 2014 Farm Bill directed USDA to write a new rule defining farm management for legal entities made up of unrelated persons that each receive separate farm subsidies even though most of the subsidy recipients do not work on the farm and many, according to numerous government reports, provide very little in the way of any significant management function. These payment recipients essentially serve as pass-throughs to the beneficial owner(s), allowing the farm to sidestep the statutory payment limit.
The key to the current loopholes is the absence of any effective definition of what constitutes farm management. Currently, one can receive farm subsidies without actually doing any farm work, provided one regularly contributes some management function, however slight.
While the proposed rule does strengthen the definition of “significant contribution of active personal management” – a step in the right direction – and requires at least 500 hours or a 25 percent share of total management time to qualify – another step in the right direction – it limits the application of these modest reforms to general partnerships and joint ventures only, and only to partnerships and ventures made up of unrelated persons, and then only to partnerships and ventures that “require” more than quadruple the current per farm payment limit.
This severely limits the impact of this proposed rule since those farms represent considerably less than four percent of participating farms. While these general partnerships and joint ventures received 18 percent of payments under the 2008 Farm Bill according to USDA, it is highly unlikely that under the new proposed rule any of the mega farms involved will have their subsidies limited. Instead, they will reorganize the business to eliminate non-family members thus avoiding the new rules altogether.
As has been the case ever since USDA put the loopholes into the implementing regulations in 1987, mega farms will be allowed to continue to skirt the farm bill payment limit, using taxpayer money to out-bid beginning farms and mid-sized farms for land and leases, leading to less diversity, fewer opportunities for those wanting to farm, and the erosion of our rural communities.
What the proposed rule fails to do is to create a fair and comprehensive approach to implementing the law. As NSAC pointed out in its press release following the release of the rule, this betrays President Obama’s commitment made when he first ran for the office of the Presidency that he would eliminate the USDA-crafted loopholes once and for all.
That promise was the very first item in the President’s campaign platform for agricultural and rural issues. Unless the proposed rule is changed to apply reform across the board to all farms, that campaign promise will remain unfulfilled when the President leaves office. This is the last chance that USDA has to right a wrong that has persisted now for over 25 years and the last chance for USDA to fulfill President Obama’s pledge.
NSAC will be encouraging family-farm advocates across the country to weigh-in on the rule during the upcoming public comment period that ends May 26 to encourage USDA to enact comprehensive and effective reform.
What the Rule Says
The proposed rule requires that farm managers who are not engaged in working the farm and who are part of farm partnerships made up of unrelated persons to contribute to 500 hours of management or at least 25 percent of the total management required for the operation annually to qualify for an additional payment limit. This requirement is bolstered by record keeping requirements and an explicit prohibition on utilizing passive activities, such as “watching commodity markets,” to meet the requirements of the rule. This is the best part of the rule…were it to be widely applied.
Under FSA’s current rules, individuals who are determined by the IRS to be “passive investors” by not contributing at least 500 hours to the enterprise are nonetheless routinely determined by FSA to be “actively engaged in the business of farming.” The new 500 hour test – were it to be widely applied – at least begins to get at this shocking discrepancy.
The proposed rule also limits the number of additional farm managers for non-family entities to one — in which case the new management definition and the 500 hour test does not apply — or in some cases two, and in other cases three.
Only in the case of two management-only participants – for farms greater than 2500 acres (or in some cases 2,875 acres) – and of three management-only participants – for farms that also are determined to be “complex” by neighboring farmers who serve on FSA county committees – would the new reforms even come into play. Those who meet the new tests would be eligibility for either two subsidy payments or three, depending on whether they are designated as merely large or large but also complex. For each one who qualifies, if they are married, the number of payment recipients double again, regardless of whether the spouse provides any management whatsoever.
Currently there is no limit on the number of farm managers, and hence mega farms can be organized as general partnerships made up of passive participants who enable the farm to qualify for unlimited subsidies.
In 2013, the House and Senate both passed farm bills with a cap of one management-only person, in addition to working farmers on the land, receiving payments, but without the farm as a whole receiving more than a single payment limit.
The proposed rule, in stark contrast, provides for up to three times the payment limit for farms with multiple entities that supply significant management but no labor for the farm. If each of those managers is also married, the farm would be eligible for up to eight payment limits worth of subsidies, or one million dollars a year.
It’s All Academic Anyway
Things go even more rapidly downhill from there with the proposed rule. This cap doesn’t apply to family-only entities. The definition of family, which the rule does not change, includes great-grand parents, grandparents, children, grandchildren, great grandchildren, siblings, stepchildren, adopted children, cousins, and or course any spouses of any of the above.
All of these participants need only qualify under the current vague and largely unenforceable regulatory requirement that they provide any function that contributes to the profitability of the farm. The new, tighter definition of management in the rule does not apply to these entities. And spouses of those qualifying under the current vague and unenforceable standard do not even need to comply with the vague requirement to qualify for an additional payment.
Hence, under the proposed rule, partnerships currently comprised of both family and non-family members can reorganize using only the extended family as partners and continue to collect multiple subsidy payments. The only payment limit under this scenario is determined by the size of the extended family.
The proposed rule would not change the status quo. About two percent of all farms, because they would otherwise hit the nominal payment limit of a quarter of a million dollars, will still be allowed to get around the limit through abusive schemes that the rule would condone.
For mega farms with unrelated, outside investors who cannot easily reorganize, they might be limited to a million dollars a year in federal crop support, or 10 times the amount approved by the House and Senate-passed farm bills. For the majority, however, the proposed rule would push them to reorganize their businesses in order to retain escape payment limits altogether.
Hence, FSA has again done what it has done each and every time it has worked on this rule since 1987 when Congress first required that payments go to active working farmers and crop share landlords. It has ensured that there will be no effective payment limit, continuing the tradition of making commodity subsidies unique among all federal entitlement programs in having no limit on the size of the government transfer.
There are a few rays of hope:
Unfortunately, these two positive moves apply only after farms have already quadrupled their payment caps. And even then the new requirements can be avoided by reorganizing.
In requesting public comments on their proposal, FSA specifically asks the public “whether farming entities owned by family members should be subject to the same limits as other farming operations.” The answer to that is a resounding yes.
They also ask “whether there should be a strict limit of one manager” in addition to those who actually work the farm, and the answer to that, as both the House and Senate are already on record as supporting, is also a resounding yes. Moreover, consistent with the House and Senate-passed farm bills, it should not increase the total payment available to the farm.
The House and Senate are also on record as supporting a $50,000 per farm cap ($100,000 with a spouse) for the two primary commodity subsidy payment programs. Sadly, that House and Senate-approved cap was changed to $125,000 ($250,000 with a spouse) in the final behind closed doors negotiations over the farm bill. There is nothing USDA can do in rulemaking to change the final farm bill deal cutters’ largesse on that number. But there is no reason it needs to issue a rule raising the limit to $1 million and leaving an easy escape route for those who decide that even that is not enough.
The public comment period will be open until May 26. The public should ask USDA to rewrite the rule to make it consistent with President Obama’s pledge, creating comprehensive reform that gets rid of the abusive loopholes once and for all.