Costs & Benefits of Proposed Rule "Payment Limitations and Payment Eligibility

- Actively Engaged in Farming" Farm Service Agency (FSA)/Economic and Policy Analysis Staff

-- March 18, 2015 Summary USDA is proposing to limit general partnerships and joint ventures to just one member that can qualify the farming operation for payments solely by a claim of providing active personal management, with exceptions for up to three managers for large and complex farming operations

. USDA is proposing a new definition of

" active personal management " that would be used exclusively for evaluating requests for more than one manager. That definition would encompass three categories of management activities: 1) managing capital , such as financing or negotiating land acquisition, 2) hiring and managing labor , and 3) crop management and marketing. Also for use in those evaluations the rule proposes a new definition of a

" significant contribution of active personal management " that requires 500 hours per year of active personal management activities , or 25% of the total management activities required for the farming operation , to qualify as

" actively engaged in farming " for the purpose of payment eligibility

. Farm operations organized as corporations , limited liability companies , and other types of business organization would not be impacted by the proposed rule. The 2014 Farm Bill requires that the limit on the number of managers and new definitions not apply to

" entities comprised solely of family members " which greatly diminishes the number of operations that could be affected and reduces potential outlay reductions. The limit on the number of managers could affect around 1 , 400 general partnerships and joint operations , reducing USDA outlays (and benefits to producers) by around $50 million total for crop years 2016 through 2018 , with an annual impact of $4 million to $38 million , depending on how many managers will meet the new requirements for a significant contribution of active personal management. The 2014 Farm Bill requires producers to be

" actively engaged " in a farm to be eligible for benefits the farm could earn from the Agriculture Risk Coverage (ARC) , Price Loss Coverage

(PLC) , and Cotton Transition Assistance (CT AP) programs. CT AP payments were only authorized for 2014 and 2015 crops , while the regulation is expected to take effect for the 2016 crop. As a result , CT AP payments will be unaffected and CT AP will not be discussed further in

this analysis

. The 2014 Farm Bill also makes two types of benefits from the marketing assistance loan program , loan deficiency payments (LDPs) and marketing loan gains (MLGs) , subject to the actively engaged eligibility requirement for the first time. The actively engaged requirement does not affect a producer

' s ability to take out a marketing loan or , at loan maturity , to forfeit the loan collateral. Section 1604 of the 2014 Farm Bill requires USDA to define what constitutes a "significant contribution of active personal management " for the purpose of being considered

" actively engaged in farming ." It also requires USDA to consider whether to limit the number of managers per operation who can qualify as

" actively engaged " based solely on a contribution of active personal management. 1Generally , producers that contribute one or more inputs from each of two groups qualify as actively engaged in farming under the current regulations : (1) capital , land , or equipment and (2) labor or management. Group (1) inputs can be rented and then contributed to the operation. (There are exceptions in the current regulations for contributions by landowners and spouses , which are not changing with the proposed rule.) Some producers can qualify as actively engaged solely by contributing active personal management , and not labor. USDA

' s current active personal management definition in 7 CFR 1400 requires that management activities must be critical to the profitability of the farming operation , but doesn't set a specific n:umber of hours or type of activities that qualify (Appendix I). Section 1604 of the 2014 Farm Bill (Appendix II) therefore requires the Secretary of Agriculture to publish a rule, for notice and comment , that defines

" significant contribution of active personal management " and gives the Secretary the option to limit the number of producers that are

" considered to be actively engaged in farming with respect to the farming operation when a significant contribution of active personal management is the basis ." Section 1604 also prohibits the Secretary from applying any of the new regulations to implement Section 1604 to farm business entities comprised solely of family members . Effects Will Be Concentrated on Crop Producers-The commodities eligible for ARC , PLC ,

MLG, and LDP benefits are barley , honey , upland cotton , chickpeas , corn , grain sorghum , lentils , oats , dry peas , soybeans , peanuts , rice , wheat , wool , mohair , and oilseeds (not all crops are eligible for all four program benefits , e.g ., upland cotton is not an eligible ARC and PLC crop). Regulations to implement Section 1604 will only affect producers that grow those crops in 2016 and subsequent years or that have established base acres of those crops by growing them in years prior to 2016 . Former upland cotton base acres are now generic base acres and may be planted to other crops that are eligible for ARC and PLC payments. The Programs Affected Have a Joint Payment Limit

- As specified in Section 1603 of the 2014 Farm Bill, the programs for which producers must be actively engaged in farming to be eligible for payments have a combined $125 , 000 per crop year payment limit per person or legal

entity (except for joint ventures and general partnerships). Payments to entities are attributed to persons as specified in the current regulations , and the payment attribution rules would not change with the rule. That limit covers all eligible crops except peanuts , which have a separate $125 , 000 limit for the four combined benefits . General Partnerships and Joint Ventures General partnerships and joint ventures have two or more members that pool their resources to operate a farm. Joint ventures operate for a shorter time than general partnerships , perhaps for a

single growing season. That difference is not important for this analysis and hereafter this report refers to both general partnerships and joint ventures as

" joint operations. "

The members of joint operations can be individuals or business entities such as a corporation. Joint operations can own land and equipment under the name of the operation and have a bank account in the operation

' s name . If the joint operation itself contributes the land , equipment and funds needed for the farm , members become actively engaged by contributing labor , management , or a combination of the 2two. When a joint operation owns all of the land it uses for farming , members are automatically deemed to be actively engaged even if they do not contribute any management or labor. The Amount of Payments Joint Operations Can Earn Depends on The Number of Actively Engaged Members and their Ownership Shares-USDA makes payments directly to joint operations , not their members. Joint operations do not have payment limits and are not themselves required to be actively engaged. However , the amount of payments a joint operation is eligible for depends on its number of actively engaged members and how ownership is divided among them. An unlimited number of members can claim management input to qualify as actively engaged. Each actively engaged member can qualify the operation to receive a share of its potential payments equal to the ownership share of that member. The amount a member can qualify a joint operation for is capped at a single $125 , 000 limit. Payments a member earns on

other operations reduce the amount the member can qualify the joint operation for if they are earned before the joint operation receives its final payment. The dependence of joint operations on actively engaged members to establish the amount of payments they qualify for means that joint operations will be the only type of farm business organization impacted by any changes brought about by Section 1604. As noted earlier , Section 1603 of the 2014 Farm Bill limits all other types of entities , such as corporations and limited liability companies (LLCs) , to a single $125 , 000 payment limit for the entire entity. Example A. (existing regulation): Equal division of ownership shares maximizes payments Granjeno Farms is a joint operation with four members , each owning 25 percent of the operation. All the land in the operation is acquired through cash rentals. Three members qualify as actively engaged by providing management alone , one qualifies by providing labor. Granjeno Farms has a potential $500 , 000 ARC payment for the 2016 crop. Each member qualifies the joint operation for a $125 , 000 payment (0.25 ownership share times

the $500 , 000 potential payment) so USDA will write a check to Granjeno Farms for the full $500 , 000. Contrast the above outcome with what would have occurred if one member were a 70 percent owner and the others owned 10 percent each with all being actively engaged , as above. The majority owner

' s share of the potential payment is $350 , 000 (0

. 70 ownership share times $500 , 000 potential payment) which exceeds the $125,000 pay limit , causing the joint operation to forgo $225 , 000 ($350 , 000 -$125 , 000)

. Each of the other members qualifies the joint operation to earn a $50 , 000 payment (0.10 ownership share times the $500 , 000 potential payment). USDA will pay Granjeno Farms $275 , 000 ($125 , 000 + $50 , 000 + $50 , 000 + $50,000). Example B. (existing regulation): A member earns payments from another operation Continuing with the Granjeno Farms equal ownership scenario (each member owns 25 percent) , suppose that one member has an individual farm. That member earns $125,000 in 2016 crop LDPs on the individual farm before Granjeno Farms receives 2016 ARC payments. The $125,000 pay limit for the member with the individual farm is exhausted so that member can no longer qualify Granjeno Farms for payments. The ARC payment is reduced from $500,000 to

$375 , 000 ($125,000 + $125 , 000 + $125 , 000 + $0 for the member with no remaining payment limit)

. 3Example C. (existing regulation): Granjeno Farms owns all the land used in the operation In this example Granjeno Farms holds title to all the cropland in the operation (In Example A the land was cash rented). Because Granjeno Farms owns all the land used in the farming operation , each of the four members is automatically deemed to be actively engaged and can qualify the operation for payments

. (As specified in 7 CFR 1400.207 , which would not change with the rule , landowners are considered to be actively engaged in farming if they share the risk of profits

or losses from the crop.) The members do not have to provide labor or management to qualify as actively engaged in farming , although they may choose to do so . Other Types Of Farm Businesses Can Not Increase Their Payments By Adding Actively Engaged Members And Are Exempt From This Rule Besides joint operations , farms use many other types of business organization with corporations and limited liability companies being among the most common . Section 1604 will not affect any types of business organization other than joint operations

. For simplicity this report will use corporations to represent all farm business entities other than joint operations. A corporation itself , not its members , must be actively engaged to qualify for payments and , as specified in Section 1603 of the 2014 Farm Bill , is ineligible for more than a single payment limit regardless of how many members it has. Corporations cannot provide management so their members must jointly provide enough management for the corporation to be actively engaged.

Though they need not be actively engaged , members of corporations must provide labor or active personal management to the corporation to qualify it for their share of the single payment limit. There is no limit on the number of members that can claim to have provided management. Since corporations cannot increase their payments by adding actively engaged members , they are not exposed to potential payment reductions brought about by Section 1604. Example D. (existing regulation): If Granjeno Farms were a corporation it would forgo payments This example uses much of the scenario from Example A above but with Granjeno farms now being a corporation

. Granjeno Farms Inc. has four members , each owning 25 percent of the operation. All the land in the operation is acquired through cash rentals. Three members fulfill their labor or management requirement by providing management alone , one by providing labor. Granjeno Farms Inc. has a potential $500,000 ARC payment for the 2016 crop. Each member qualifies the joint operation for $31 , 250 of the single $125 , 000 payment limit (0.25 ownership share times the $125 , 000 payment limit) so USDA will write a check to Granjeno Farms Inc. for $125 , 000. The corporate business organization causes Granjeno Farms Inc. to forgo $375 , 000 in payments (potential $500 , 000 ARC payment

- $125 , 000 received) as compared to the payments it would receive were it a joint operation (see Example A). Example E. (existing regulation) Granjeno Farms Inc. has a member that does not contribute services to the farming operation This example is the same as Example D above, except: three members fulfill their service requirement by providing management , while one member lives far away and provides no labor 4or management services to the farming operation

. Granjeno Farms Inc. will forgo $31 , 250 of the $125 , 000 it would have received if all members contributed management or labor (0.25 ownership share of the noncontributing member times the $125 , 000 payment). The Proposed Rule Would Limit Number of Joint Operation Members That Can Claim Solely Management to Qualify As Actively Engaged The proposed rule would make two important changes to how management contributions qualify farming operations for payments: 1) Section 1604 of the Farm Bill requires the Secretary to consider limiting the number of managers per operation who may qualify as actively engaged in farming based solely on a contribution of active personal management. It did not specify what that numerical limit should be. As a discretionary decision , the rule would set the limit of such managers per joint operation

at three , farms other than joint operations would not be impacted. By default , joint operations would be allowed just one member who would qualify as actively engaged by claiming solely management. Members claiming both management and labor would not be affected by that limit. Large or complex joint operations could seek to qualify one or two additional members as acti v ely engaged by contributing solely management , but in no case would they be allowed more than three managers total. Operations which qualify as large or complex operations would be required to keep written records of all management activities for all managers in the operation. 2) The 2014 Farm Bill requires USDA to specify a definition for

" a significant contribution of active personal management " in regulation

. The specific definition proposed reflects a discretionary analysis of various alternatives , including a minimum level of interest a person must hold in a farming operation before the person could qualify as actively engaged with only an active personal management contribution , a weighted ranking of critical activities performed , or a higher hourly threshold. The hourly requirement standard proposed here (500 hours or 25% of the total management required for the operation) is intended to address the 2014 Farm Bill requirement for clear and objective standards . It uses a list of activities in a revised definition of " active personal management '; only hours spent on these activities count towards the 500-hour standard .

USDA would include three types of activities in its revised definition for active personal management: i) Managing capital , which encompasses arranging financing , acquiring equipment or

land , managing crop insurance and managing participation in USDA farm programs. ii) Managing labor. iii) Managing crop production and marketing. The proposed revision of the management definition would apply only to joint operations attempting to have more than one manager qualify as actively engaged in farming based solely on a significant contribution of active personal management. 5Example F. (proposed regulation): The Granjeno Farms joint operation under the proposed regulation In Example A above , Granjeno Farms was a joint operation with four members , each with a 25 percent share of the operation. Three members qualified as actively engaged solely by providing management , one by providing labor. Under current regulations that configuration would allow Granjeno Farms to earn a $500 , 000 ARC payment for the 2016 crop

. The proposed regulation by default would limit Granjeno farms to one member that qualifies as actively engaged by providing management , so the operation will have to forgo $250 , 000 of its $500 , 000 potential ARC payment (2 members that can no longer can qualify the operation for payments times the 0.25 ownership share of each member times the $500 , 000 potential ARC

payment to the joint operation)

. Suppose Granjeno requests that their farming operation should be allowed an additional member that qualifies as actively engaged solely by providing management. After considering the size and complexity of the operation, USDA grants the request so the operation would receive another $125 , 000 of its $500 , 000 potential payment (1 additional member that qualifies the operation for payments times that member

' s 0.25 ownership share times the $500 , 000 potential ARC payments to the joint operation). Example G. (proposed regulation): Granjeno Farms Inc. under the proposed regulation Example D examined the outcome for Granjeno Farms if it were constituted as a corporation with four members , each owning 25 percent of the operation. Under existing regulations that configuration allowed the farming operation to be paid $125 , 000 of its $500 , 000 potential payment. To understand this example it's important to remember that Granjeno Farms Inc. itself , not its members , must be actively engaged , although each member must contribute something and the members jointly must contribute enough management for the corporation to qualify as actively engaged. Under the new regulation , the three members claiming a management contribution are not impacted because it is still the corporation , not each member , that is required to be actively engaged. Assuming that the contributions of the three members still qualify the corporation as

actively engaged , each of the three would continue to be able to claim a management contribution and Granjeno will receive the same $125 , 000 ARC payment that it did under the existing regulation. 6Participation In The Direct Payment Program Used to Predict Which Joint Operations Will Participate in Programs Subject to Section 1604 ARC and PLC payments have not yet begun and LDPs and MLGs have been small in recent years. Consequently , administrative data that identifies joint operations receiving payments subject to Section 1604 does not yet exist. This analysis uses joint operations that received crop year 2013 Direct Payments as a proxy

. Direct Payments were available for all commodities covered by ARC , PLC , LDPs , and MLGs except for pulses , wool , mohair , and honey. Only producers with base acres could receive Direct Payments, as will be the case for ARC and PLC payments , establishing a linkage between producers participating in the Direct Payment program and those that are likely to participate in ARC or PLC . LDPs and MLGs do not require base acres , but since they cover essentially the same commodities as Direct Payments , receipt of Direct Payments also indicates that a producer is likely to receive LDPs and MLGs. Using the receipt of 2013-crop Direct Payments criteria , around 31 , 000 joint operations are expected to receive ARC , PLC , LDP , or MLG benefits at some point during crop years 2014 to 2018 (Table 1 ). Most Joint Operations Will Be Exempt from Section 1604 Regulations

The 2014 Farm Bill requirement that the regulation not apply to

" individuals or entities comprised solely of family members " exempts the bulk of joint operations and reduces outlay reductions that might be brought about by the rule (Table 1). Prior legislation (7 U . S.C.1308- l(c)(l)) provides that a

" landowner contributing the owned land to a farming operation shall be considered to be actively engaged in farming with respect to the farming operation. " That

provision means that members of a joint operation are automatically deemed to be actively

engaged if the joint operation holds title to all the land used by the farming operation , providing an additional exemption from the proposed rule. Among joint operations that are not exempt , only around 1 , 400 have more than one member providing solely management (Table 1 , Map 1 ) , these are the only farming operations that might have their payments reduced by the proposed rule. 7Table 1. Most Joint Operations Will Be Exempt From Sec. 1604 Regulations Because Their Members Are All Family Members Or Because The Joint Operation Owns Land % of program year Count of joint 2013 total direct operations payments a/ Joint operations likely to participate in A programs covered by the actively engaged eligibility requirement 31,092 18 Joint operations exempt because they B are comprised solely of family members 24,688 12 Joint operations wholly or partially c exempt because they own land (excluding those comprised solely of family members) 2,371 1 D =(A-B-C) Joint operations not exempt 4,033 5 E Nonexempt joint operations with more than 1 member that only contributes =(F+G+H) management 1,449 2 Nonexempt joint operations with 2 F members that only contribute management, with exception could receive full payments 461 rounds to 0 Nonexempt joint operations with 3 G members that only contribute management, with exception could receive full payments 353 rounds to 0 Nonexempt joint operations, with more H than 3 managers, would lose some payments even with exception 635 aJ Proxy for the % of ARC, PLC , MLGs, & LDP benefits that will be received in 2014-18 The Proposed Regulation Could Reduce Payments to Joint Operations by Around $50 Million Total over the Life of the 2014 Farm Bill If every joint operation had only one member who could use a management claim to qualify the operation for payments, USDA projected outlays would be reduced by around $66 million in aggregate for 2016-18 payments (Table 2)

. Given that a portion of joint operations will likely meet the large or complex farming operation standards specified in the rule to be allowed two or three qualifying managers, a more realistic and conservative estimate is projected savings of around $50 million for 2016-18 payments. Appendix III provides detail on the methodology used for the outlay reduction forecasts. 8

1Mapl1,449JointOperationsWouldNotBeExemptFromTheProposedRegulationAndHaveMoreThan1ManagerCountOfJointOperationsc=J1-6c=J7-21-22-43-44-82Source:FSADirectAttributionReportingApplicationdataasofMay14,2014&FSABusinessFileDataAsOfAug.26,2014••FSAEconomicandPolicyAnalysisStaff9Table 2. Projected Savings From Limiting The Number Of Managers In a Joint Operation That Can Qualify The Operation For Payments ($) Number of managers (a) (b) (c)

total savings that qualify a joint 2016 2017 2018 for 2016-18 operation for payments: (a+b+c) 1 38 , 502 , 242 16 , 519 , 954 11 , 374 , 702 66 ,3 96 , 898 2 23 , 430,941 9 , 980 , 758 6 , 867 , 457 40,279,156 3 13 , 955 , 094 5 , 881 , 360 4 , 006 , 457 23,842,911 Maps 2 _ 1M through 2_3M show that 2017 crop year payment reductions from allowing one ,

two , and three managers per joint operation would be concentrated in the Plains States, Com Belt , and Delta. 1 (Maps illustrating 2016 and 2018 payment reductions for one , two , and three managers are shown in Appendix IV; 2017 is shown here as the results are intermediate between the 2016 and 2018 payment reductions.) The bulk of ARC and PLC payments in any of the 3 years will be made in those three regions , explaining why they would bear the bulk of payment reductions stemming from Section 1604 regulations. 1 Some Joint Operations have production in multiple counties . For those operations , their projected total payment reductions are included in each of the counties in which they operate. This over-counting does not affect Table 2. 10Map2_1M.LimitingJointOperationsToOneMemberThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$17MillionIn2017CropYearPaymentsOutlayReductions($)CJ113-46,448CJ46,449-154,814..154,815-379,356..379,357- 1,176,420Source:FSADirectAttributionReportingApplicationdataasofMay14,2014&FSABusinessFileDataAsOfAug.26,2014•FSAIEconomicandPolicyAnalysisStaff11Map2_2M.LimitingJointOperationsToTwoMembersThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$10MillionIn2017CropYearPaymentsOutlayReductions($)101-36,50436,505-124,182..124,183-297,907..297,908-938,636Source:FSADirectAttributionReporting Applicationdataas ofMay14,2014&FSABusinessFileDataAsOfAug.26,2014FSAIEconomicandPolicyAnalysisStaff12Map2_3M.LimitingJointOperationsToThreeMembersThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$6MillionIn2017CropYearPaymentsOutlayReductions($)c=i101.54,304c=i54,305-166,627..166,628-335,978-335,979-720,163Source:FSADirectAttributionReportingApplicationdataasofMay14,2014&FSABusinessFileDataAsOfAug.26,2014FSAIEconomicandPolicyAnalysisStaff13Appendix I Code of Federal Regulations, Title 7, Definitions of Active Personal Management and Significant Contribution of Active Personal Management (relevant excerpts from definitions in current use) NOT E: The current definition s in§ 1400.3 would not be changed by the proposed rule. They

will continue to apply

. § 1400.3 Definitions A ctiv e p e r s onal manag e ment means personally providing and participating in: ( 1) The general supervision and direction of activities and labor involved in the farming operation ; or (2) Services (whether performed on-site or off-site) reasonably related and necessary to the farming operation , including: (i) Supervision of activities necessary in the farming operation , including activities

involved in land preparation , planting , cultivating , harvesting , and marketing of agricultural commodities , as well as acti v ities required to establish and maintain conserving cover crops on CRP acreage and activities required in livestock operations ; (ii) Business-related actions , which include discretionary decision making ; (iii) Evaluation of the financial condition and needs of the farming operation; (iv) Assistance in the structuring or preparation of financial reports or anal y ses for the farming operation ; (v) Consultations in or structuring of business-related financing arrangements for the farming operation ; (vi) Marketing and promotion of agricultural commodities produced by the farming

operation ; (vii) Acquiring technical information used in the farming operation ; and (viii) Any other management function reasonably necessary to conduct the farming operation and for which service the farming operation would ordinarily be charged a fee. Significant C ontribution .. . (3) With respect to active personal management , activities that are critical to the profitability of the farming operation , taking into consideration the person's or legal entity's commensurate share in the farming operation ; and ( 4) With respect to a combination of active personal labor and active personal management , when neither contribution by itself meets the requirement of paragraphs (2) and (3) of this definition , a combination of active personal labor and active personal management that , when made together , results in a critical impact on the profitability of the farming operation in an amount at least equal to either the significant contribution of active personal labor or active personal management as defined in paragraphs (2) and (3) of this definition . 14Proposed Definitions of Active Personal Management and Significant Contribution of Active Personal Management NOT E : The proposed definition below would apply only to joint operations requesting to have more than one manager qualify as actively engaged in farming based solely on a significant contribution of active personal management. Active per s onal management means personally providing and participating in

management activities considered critical to the profitability of the farming operation and performed under one or more of the following categories: (1) Capital , which includes: (i) Arranging financing and managing capital ; (ii) Acquiring equipment ; (iii) Acquiring land and negotiating leases ; (iv) Managing insurance ; and (v) Managing participation in USDA programs; (2) Labor , which includes hiring and managing of hired labor ; and (3) Agronomics and marketing , which includes : (i) Selecting crops and making planting decisions; (ii) Acquiring and purchasing crop inputs ; (iii) Managing crops and making harvest decisions; and (iv) Pricing and marketing of crop production. Significant contribution of active per s onal management means active personal management activities performed by a person , with a direct or indirect ownership interest in the farming operation , on a regular , continuous , and substantial basis to the farming operation , and

meets at least one of the following to be considered significant : ( 1) Performs at least 25 percent of the total management hours required for the farming operation on an annual basis ; or (2) Performs at least 500 hours of management annually for the farming operation. 15Appendix II: Section 1604 Of The 2014 Farm Bill SEC. 1604. RULEMAKING RELATED TO SIGNIFICANT CONTRIBUTION FOR ACTIVE PERSONAL MANAGEMENT. (a) REGULATIONS REQUIRED.-Within 180 days after the date of the enactment of this Act , the Secretary shall promulgate , with an opportunity for notice and comment , regulations- ( I) to define the term

" significant contribution of active personal management " for purposes of section lOOlA of the Food Security Act of 1985 (7 U.S.C. 1308-1); and (2) if the Secretary determines it is appropriate , to establish limits for varying types of farming operations on the number of individuals who may be considered to be actively engaged in farming with respect to the farming operation when a significant contribution of active personal management is the basis used to meet the requirement of being actively engaged in farming under section 1001A of the Food Security Act of 1985 (7 U.S.C. 1308-1) by an individual or entity. (b) CONSIDERATIONS.-In promulgating the regulations required under subsection (a) , the Secretary shall consider

-

( 1) the size , nature , and management requirements of each type of farming operation; (2) the changing nature of active personal management due to advancements of farming operations; and (3) the degree to which the regulations promulgated pursuant to subsection (a) will adversely impact the long-term viability of the farming operation. (c) FAMILY FARMS.-The Secretary shall not apply the regulations promulgated pursuant to subsection (a) to individuals or entities comprised solely of family members (as that term is defined in section 1001(a)(2) of the Food Security Act of 1985 (7 U.S.C. 1308(a)(2)))

. (d) MONITORING.-The regulations promulgated pursuant to subsection (a) shall include a plan for monitoring the status of compliance reviews for whether a person or entity is in compliance with the regulations. (e) PAPERWORK REDUCTION.-In order to conserve Federal resources and prevent unnecessary paperwork burdens , the Secretary shall ensure that any additional paperwork required as a result of the regulations promulgated pursuant to subsection (a) be limited to those persons who are subject to such regulations

. (t) RELATION TO OTHER REQUIREMENTS.-Nothing in this section may be construed to authorize the Secretary to alter, directly or indirectly, existing regulations for other requirements in section lOOIA of the Food Security Act of 1985 (7 U.S.C. 1308-1). (g) EFFECTIVE DA TE .- The requirements of any regulation promulgated pursuant to this section shall apply beginning with the 2015 crop year. 16Appendix Ill: Methodology Data To project the impacts of the proposed changes to determinations invol v ing

" significant contribution of active personal management ," several different data sources data were used. These included

-

•

" Direct Attribution Reporting Application " (DARA) records on program year 2013 Direct Payments received directl y by general partnerships and joint ventures (

" joint operations

" ) and indirectly by their respective members. •

" Business File " records regardingo Contributions of joint operations ' members to both • Capital , land , and equipment , and • Labor and management; and o Lineal family relationships in joint operations ' structures (because joint operations composed of all lineal family members are statutorily exempt from the effects of the proposed rule change on payment eligibility). • Program y ear 2013 actual Direct Payment outlays by commodity for the Direct and Counter-c y clical (DCP) Program and Average Crop Revenue E lection (ACRE) Program and program year 2013 base acres enrolled in the DCP and ACRE programs. • President

' s Budget-related data for the Agriculture Risk Coverage (ARC) , Price Loss Coverage (PLC) , and Marketing Assistance Loan programs which were used to project ' out-year ' outlays by fiscal and program year and by commodity. Specificallyo ARC and PLC payment rates for each covered commodity and peanuts per respective base acre (national) , o ARC and PLC payment yields for each covered commodity and peanuts per respective base acre (national) , o Loan deficiency payments (LDPs) and marketing loan gains (MLGs) per respective base acre (per-base-acre payment rates were computed specifically for this analysis ), o E nrolled base acres by covered commodity and peanuts after participants are allowed , at their discretion , to make adjustments in those base acres for each farm based on recent planting history , and o

" Generic base acres " on which ARC and/or PLC participants would receive payments for the applicable covered commodities and/or peanuts. Assumptions These data were used to project the outlay impacts for the remaining y ears of the 2014 Farm Bill (2016 , 2017 , and 2018) for which the proposed rule would appl y. Several simplifying assumptions were made , the most important of which are that: • Joint operation structures (members and contributions) in 2013 would be unchanged in the 2016-2018 program years , and • The national ratio of combined ARC , PLC , LDP , and MLG projected payments per base acre to 2013 Direct Payments (DCP and ACRE treated separately) for each payment 17commodity would be the same across all joint operations expected to be affected by the proposed rule change. (Unlike Direct Payments (for which there was a single nationwide payment rate for each of DCP and ACRE) , ARC , PLC and marketing loan benefits can and will vary by farm (and applicable joint operation) based on applicable payment formulas and, in the case of LDPs and MLGs , on the date the applicable benefit is realized. Moreover , participating farms are generally expected to either opt to participate in ARC or PLC , but , at this point , without knowing which farms and joint operations would choose which programs , ARC and PLC payments per base acre were combined in the ratio above.) Methodology This methodology described in sections (1)-(4) below is used to project the applicable ARC + PLC + LDP+MLG payments for each joint operation that would be affected by the proposed rule . The projected outlays for the joint operations and their members are calculated both before and after the proposed implementation of the rule. From that , the change in projected outlays is forecast as well as the location and number of joint operations that would be

affected .

(1) Calculation of National-level Ratios To arrive at the payment amounts that would be affected by the proposed change , two sets of ratios were calculated that were in tum multiplied by the 2013 Direct Payments of all non-lineal family member-based joint operations to determine :

• those entities ' projected payments prior to and following the proposed rule change and • the corresponding projected outlay savings from limiting the number of members for each applicable joint operation who would be eligible for payments if their contribution to the joint operation was solely management. Due to the fact that the 2014 Farm Bill made some significant changes in programs , two sets of national-level ratios were calculated: a. The ratio of projected base acres on which payments could be generated by commodity to 2013 actual base acres that were enrolled in the 2013 DCP and ACRE programs (where generic base acres were allocated to those covered commodities that were expected to be planted on such acres , and therefore eligible for ARC or PLC payments on such acres); and b. For each applicable commodity , the ratio of combined ARC, PLC , LDP , and MLG projected payments per base acre to the 2013 actual DCP Direct payments and ACRE Direct Payments. (2) Using Business File Data to Determine which Joint Operations Would Be Affected by the Proposed Rule Changes During the 2012 program year , the Farm Service Agency (FSA) instituted electronic reporting for entities of all types

- the

" Business File " data mart. Based on entities ' input , FSA assembled

a database of program-participating entities , their members (at up to four levels down , including the top-level) , and the members ' contributions to capital , land , equipment , labor , and 18management , a s well as the familial relationships among entity members . For this analysis , the Business File was queried to first extract data for joint operations. Using the contribution and

familial relationship data , the joint operation data was limited to those entities that were not composed of family members , did not own the land used in the operation , and which had more than one member claiming management as his/her only contribution to the joint operation

. (3) Multiplying 2013 Direct Payments for Each Applicable Joint Operation's Second Level Members by the National-level Ratios The selected subset of the Business File

' s joint operations that were selected in (2) abo v e were in turn used to selected the 2013 Direct Pa y ments in DARA made directl y to the applicable entities and indirectly to their members. In tum , the DCP-Direct and ACRE-Direct Payment for each commodity for the members of these selected entities were multiplied by the product of: • T he applicable DCP-Direct or ACRE-Direct Payment ratio (i

. e. , the ratio for which the applicable 2013 payment ratio used one of the afore-mentioned payments in the denominator (see (l)(b) above) , and • The base-acre ratio for the applicable commodity (see (l)(a) above). (4) Final Determinations The total projected payments across applicable commodities for each member were calculated by program year. Management-onl y members for each entity were then ranked according to their projected payment totals in each year. The payments of the management-onl y member for whom payments were largest were retained , except that they may ha v e been reduced for the applicable $125 , 000 payment limitation. Lower-payment-level management-only members ' payments were in tum reduced to zero. However it wa s assumed that some portion would retain their payments due to their respective joint operations being deemed large and/or complex entities . In no case for this analysis was a given joint operation allowed to have more than three management-onl y members who would be eligible for ARC , PLC , LOP and MLG benefits. 19AppendixIV2016and2018MapsSomeJointOperationshaveproductioninmultiplecounties.Forthoseoperations,theirprojectedtotalpaymentreductionsareincludedineachofthecountiesinwhichtheyoperate.20Map3_1M.LimitingJointOperationsToOneMemberThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$39MillionIn2016CropYearPaymentsOutlayReductions($)D16s-122.202D122.203-334,988-334,989-683,417-683,418-1,696,279Source:FSADirectAttributionReportingApplicationdataasofMay14,2014&FSABusinessFileDataAsOfAug.26,2014FSAIEconomicandPolicyAnalysisStaff21Map3_2M.LimitingJointOperationsToTwoMembersThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$23MillionIn2016CropYearPaymentsOutlayReductions($)C=:J104-76,082C=:J76,083-226,539..226,540-509,981..509,982-1,064,688Source:FSADirectAttributionReportingApplicationdataasofMay14,2014&FSABusinessFileDataAsOfAug.26,2014FSAIEconomicandPolicyAnalysisStaff22Map3_3M.LimitingJointOperationsToThreeMembersThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$14MillionIn2016CropYearPayments..,,,,.._"\OutlayReductions($)108-63,65063,651-174,372..174,373-419,660..419,661-864,354Source:FSADirectAttributionReportingApplicationdataasofMay14,2014&FSABusinessFileDataAsOfAug.26,2014••FSAIEconomicandPolicyAnalysisStaff23Map4_1M.LimitingJointOperationsToOneMemberThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$11MillionIn2018CropYearPaymentsOutlayReductions($)D105-32,848D32,849-113.276-113,277-261,880-261,881-856,827Source:FSADirectAttributionReportingApplicationdataas ofMay14,2014&FSABusinessFileDataAsOfAug.26,2014._,.FSAIEconomicandPolicyAnalysisStaff24Map4_2M.LimitingJointOperationsToTwoMembersThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$7MillionIn2018CropYearPaymentsOutlayReductions($)103-23,361D23,362-80.037-80,038-216,100-216,101-681,454Source:FSADirectAttributionReportingApplicationdataasofMay14,2014&FSABusinessFileDataAsOfAug.26,2014FSAIEconomicandPolicyAnalysisStaff25Map4_3M.LimitingJointOperationsToThreeMembersThatCanClaimSolelyManagementToQualifyAsActivelyEngagedCouldSaveAround$4MillionIn2018CropYearPaymentsOutlayReductions($)C=:J107-21,205C=:J21,206-66,925..66,926-152,556..152,557-521,027Source:FSADirectAttributionReportingApplicationdataasofMay14,2014&FSABusinessFileDataAsOfAug.26,2014FSAIEconomicandPolicyAnalysisStaff26FSA I EP AS Contacts: John Jinkins John.Jinkins @ wdc.usda.gov Terry Hickenbotham Terry

. Hickenbotham @ wdc.usda.gov 27