Whether expressed in nominal or constant dollars, government payments in the 2007-09 period represent the lowest total volumes paid to producers since 1997. During this period, however, the importance of government payments as a percent of net cash farm income varied by ERS production region.

Low levels of crop payments as a function of prices in 2007-09 and low milk program support payments meant that the government payments' shares of net cash farm income were on average less than 20 percent for producers in the Northeast, Corn Belt, Lake States, and the Pacific regions.

The government payments' shares of net cash farm income were on average highest in the southeast quadrant of the U.S., where government payments represented on average 50 percent or more of net cash farm income for producers in the Southeast and Southern Plains regions.

Farm Income and Costs: Farms Receiving Government Payments

The amount of government payments and their importance to farm income vary by the type of program, characteristics of the farm operation, and location of the farm. We group 1997, 2002, and 2008 Farm Act program payments into four broad categories:

Direct or 'fixed' paymentsbased on historical cropping patterns on a fixed number of enrolled acres and not linked to the operator's current decisions on what to produce and when to market farm output. Prior to the 2002 Farm Act, production flexibility contract payments functioned as fixed payments.

Payments that depend on current market prices for enrolled commodities. These payments are comprised of countercyclical payments, loan deficiency payments, marketing loan gains, and certificate gains. Prior to the 2002 Farm Act, emergency market loss assistance payments were made to producers when commodity prices fell to historical lows.

Conservation program payments, principally from the Conservation Reserve Program, Environmental Quality Incentives Program, and the Conservation Security Program (which together disbursed over 89 percent of all conservation payments made to farmers in 2009).

Other payments include those made by emergency and disaster relief programs, milk support programs, the peanut and tobacco buyout programs, and small miscellaneous programs.

Direct payments and payments based on market prices represent 'commodity program payments' since they are tied to current or historical acreage of program-eligible crops. For the years 2000-09, commodity program payments represented on average 60 percent of government payments to farmers, conservation payments accounted for 14 percent of all government payments, and other payments represented 26 percent of the total. Direct payments, on average, accounted for half of commodity program payments.

High program payments based on market prices in 2000-01 were due to historically low commodity prices. In addition, producers received emergency market loss assistance payments authorized by Congress. In 2005, Hurricane Katrina closed down the Port of New Orleans, generating large stockpiles of harvested commodities in the Midwest and a drop in commodity prices, leading to a short-term spike in marketing loan benefits.

Whether expressed in nominal or constant dollars, government payments in the 2007-09 period represent the lowest total volumes paid to producers since 1997. However during this period, the importance of government payments as a percent of net cash farm income varied by ERS production region. Low levels of crop payments as a function of prices in 2007-09 and low milk program support payments meant that the government payments’ shares of net cash farm income were on average less than 20 percent for producers in the Northeast, Corn Belt, Lake States, and the Pacific regions. The government payments’ shares of net cash farm income were on average highest in the southeast quadrant of the U.S., where government payments represented on average 50 percent or more of net cash farm income for producers in the Southeast and Southern Plains regions.

Payments by Type of Farm, 2009

Farm program payments vary by type of farm. In 2009, 820,000 farms (37 percent of all farms) received $9.5 billion in government payments. Among the farm types, government payments were paid to 3 out of 10 rural residence farms, 4 out of 10 intermediate farms, and 7 out of 10 commercial farms.

• Rural residence farms are small farms whose operators are either retired or reported a major occupation other than farming. Rural residence farms represent almost half of the farms receiving government payments and received 19 cents of the government payment dollar—12 cents from conservation programs, 5 cents from commodity programs, and 2 cents from other programs.

• Intermediate family farms are small family farms whose operators reported farming as their major occupation. Intermediate farms represent almost one-third of government payment farms and received 19 cents of the government payment dollar—9 cents from commodity programs, 5 cents from conservation programs, and 5 cents from other programs.

• Commercial family farms are large-scale farms with gross annual sales of $250,000 or more. Commercial farms represent one-fourth of all government-payment farms and received 62 cents of the government payment dollar—39 cents from commodity programs, 14 cents from other programs, and 9 cents from conservation programs.

Commodity Payments by Type of Farm, 2009

In 2009, commodity program payments, which are based on the farm's current or historical level of production, accounted for almost 50 percent of all government payments. Large economies of scale allowed commercial farms to produce 83 percent of the value of all program commodities. Rural residence farms produced only 5 percent of the total value of program commodities, while intermediate farms produced 12 percent. Therefore, it is not surprising that:

• Commercial farms received 74 percent of commodity program payments in 2009. They generated sales of $789,000 per farm by producing output on 1,820 acres, on average.

• Intermediate farms received 17 percent of commodity program payments in 2009. They generated sales of $78,000 per farm by producing output on 575 acres, on average.

• Rural residence farms received 9 percent of all commodity payments in 2009. They generated sales of $25,000 per farm by producing output on 243 acres, on average.

Conservation Payments by Type of Farm, 2009

Conservation payments are made to farms based on the characteristics of the operator's land and the particular objectives of the conservation programs, not on the volume of farm production. Together, rural residence and intermediate farms received 65 percent of conservation payments, a combined $1.6 billion in 2009. Participation in conservation programs is attractive for small farms in part because their variable costs of production are higher and return on assets lower than for commercial farms.

• In 2009, among government payment farms, the average net income per acre for rural residence farms was about $20 per acre, compared with $104 per acre for commercial farms.

Government Payments by Type of Farm, 2000-09

The distribution of government payments to farmers has changed over the last 10 years. The shares of government payments have risen for rural residence and commercial farms while they have declined for intermediate farms. This trend has been due in part to the declining number of intermediate farms and in part to more farms receiving conservation program funding being classified as rural residence farms.

• The share of government payments received by intermediate farms declined by half, from 39 percent in 2000 to 19 percent in 2009. The share of value of production accounted for by intermediate farms fell from 28 percent in 2000 to 12 percent in 2009. Over the last decade, increasing economies of scale and greater commodity demand have led to increased farm size and further crop specialization. This process has generated larger per-farm sales of program commodities, pushing over 96,000 intermediate farms into the commercial farm category.

• Even though the value of production among rural residence farms averaged almost 6 percent over this period, their share of government payments rose from 13 percent in 2000 to 19 percent in 2009. Contributing factors to the increased rural residence farms' share of government payments in 2000-09 are:

– The range of farms qualifying for disaster assistance was expanded to include more rural residence farms.

– Beginning in 2005, rural residence farms and quota holders received a disproportionate share of disbursements from the Tobacco Transition Program.

– 15,000 smaller intermediate farms became rural residence farms, either through operator retirements or nonfarm employment recorded as the operator's primary occupation.

Over 2000-09, rural residence farms that received government payments on average received $4,700 per farm, intermediate farms received $10,800 per farm, and commercial farms received $43,700 per farm. The per-farm government payment for commercial farms has fluctuated more than for rural residence and intermediate farms because commercial farms produce the largest share of program crops. Low commodity prices in 2000-01 and in 2005 due to Hurricane Katrina led to the highest average levels of government payments (over $60,000 per farm for commercial farms) while high commodity prices from 2007 to 2009 cut the average per farm payments roughly in half.

Payments by Farm Sales Class, 2000-09

Since many government payment programs are functions of commodity prices, the government payment per acre varies across time and by farm size. Low-sales farms generate less than $50,000 in sales; medium-sales farms generate sales ranging from $50,000 to $500,000; high-sales farms generate farm sales over $500,000.

Among farms receiving government payments over the 2000-09 period:

• Low-sales farms received, on average, $16 per acre.

• Medium- and high-sales farms experienced larger fluctuations in government payments per acre, reflecting more exposure to fluctuations in commodity prices.

• Since higher levels of productivity generate larger yields, high-sales farms received, on average, $23 per acre, or almost $6 more in government payments per acre than medium-sales farms.

Very low program commodity prices in 2007-09 have narrowed the range of government payments per acre received by all farms such that low-sales farms received the highest payment per acre of all farm sales classes in 2009.

Average government payments to producers as a percentage of their gross cash income reflects the importance of the government payment to farm income. Among farms receiving government payments, government payments represent a smaller share of gross cash income as farm sales increase.

• Low-sales farms receiving payments received, on average, $3,800 in government payments during 2000-2009, representing 22 percent of their gross cash income.

• For medium- and high-sales farms, government payments as a percentage of gross cash income are sensitive to swings in commodity prices. In 2000-2001, when commodity prices were historically low, government payments averaged 17 percent of gross cash income for medium-sales farms and almost 9 percent for high-sales farms.

• In 2007-09, high commodity prices resulted in smaller government payments to medium- and high-sales farms. Government payments as a share of gross cash income were about one-third of 2000-01 levels.

Net cash income equals gross cash income minus cash expenses. While gross cash income reflects the producer's cash sales, which account for yield and price fluctuations, net cash income also reflects changes in the producer's input costs. Among farms receiving government payments:

• The government payment shares of net cash income and gross cash income generally declined from their 2000-2001 levels to the low payout years of 2007-09, due largely to commodity price trends.

• During 2000-01, the historically low prices generated large marketing loan benefits and emergency market loss assistance payments; government payments averaged almost 15 percent of gross cash income and 72 percent of net cash income.

• Hurricane Katrina resulted in a spike in the government payment share of net cash income in 2005 and 2006.

• During 2007-09, low levels of government payments paid to producers substantially narrowed the spread between government payments as shares of net cash income and gross cash income relative to previous years. Although producers enjoyed high commodity prices in 2008-09, rising farm imput costs caused this spread to begin to widen.

Payments by Farm Production Type, 2000-09

Largely because of price-sensitive payment programs, government payments help to supplement incomes when farm profits are low or negative. During 2000-09, net cash income to gross cash income averaged almost 23 percent for farms receiving government payments and almost 16 percent for farms not receiving any government payment; net cash income as a share of total farm household income averaged 49 percent for government payment farms and 14 percent for farms not receiving government payments.

Farms generating 50 percent or more in total farm sales from a single commodity are classified as specialized commodity producers. Ninety-seven percent of all farms specializing in the production of wheat, corn, soybeans, and cotton receive government payments. Net cash income represented 47 percent of household income for wheat farmers over 2000-2009, 61 percent for corn farmers, 67 percent for wheat farmers, and 91 percent for cotton producers. Among wheat, corn, soybean, and cotton farms receiving government payments:

• During low-price years, government payments represented a significantly larger share of net cash income for wheat and soybean farms relative to the all-farm average.

• In 2000-01, government payments represented nearly all net cash income for wheat, corn, and soybean producers and over three-fourths for cotton producers.• Since 2002, government payments have been half of net cash income for wheat, corn, soybean, and cotton producers. The ratio of government payments to net cash income appears to be more stable since the 2005 price spike generated by Hurricane Katrina.

During 2000-09, government payments per acre reflect differences in market and growing conditions facing wheat, corn, soybean, and cotton producers. Market conditions for corn and soybean producers followed similar trends.

• During the last 7 years, cotton producers received marketing loan benefits and commodity certificate gains while other crops remained ineligible.

• Corn producers in the Heartland experienced the strongest effects of Hurricane Katrina, as reflected in the spike in government payments per acre in 2005.

• Low government payments per acre for wheat farmers relative to other program crops reflect their lower yields. Wheat producers averaged $83 per acre in sales, versus $243 per acre for cotton producers, $220 per acre for soybean producers, and $319 per acre for corn producers.

Fluctuations in Commodity Prices Affect Rural Economic Well-Being

Even though close to 8 out of 10 rural (nonmetro) counties are dominated by nonfarm activities, agriculture is still an important income-producing sector in many rural areas. One justification for Federal farm program payments is that they help support the well-being of rural counties. By program design, farm program payments increase when commodity prices fall and/or a farming region experiences a weather shock such as drought or flooding, whereas high commodity prices reduce farm program payments. Government payments supplementing farm incomes act to stabilize the economic well-being of these counties—as measured by county personal income (CPI).

High commodity prices in 2007 mark the lower limit of the contributions of farm program payments to rural CPI.

• Kiowa County, Colorado, and Sherman County, Oregon, recorded farm program payments accounting for at least 20 percent of CPI in 2007.

• 42 other counties, primarily in the Great Plains States, recorded farm program payments accounting for 10 to 20 percent of CPI;

• 130 counties recorded farm program payments accounting for 5 to 10 percent of CPI.

In 2005, Hurricane Katrina's impact on agriculture generated high levels of government payments to producers, resulting in the widening and deepening of county-level dependence on government payments.

Of the 1,142 rural counties with government program payments accounting for at least 1 percent of CPI, 365 new counties reached this threshold in 2005 and 443 counties already at this threshold further increased their dependence on program payments:

• Greely County, Kansas; Kiowa County, Colorado; and Hayes County, Nebraska recorded farm program payments accounting for at least 40 percent of CPI in 2005, while 7 other counties recorded farm program payments accounting for 30 to 40 percent of CPI;

• 33 counties recorded farm program payments accounting for 20 percent up to 30 percent of total county personal income;

• 176 counties recorded farm program payments accounting for 10 to 20 percent of CPI; and

• 272 counties recorded farm program payments accounting for 5 to 10 percent of CPI in 2005.