RE: RIN 0560-AI31; Payment Limitation and Payment Eligibility; Actively Engaged in Farming

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1 May 26, 2015 Mr. James Baxa Production, Emergencies and Compliance Division FSA, USDA, Stop Independence Ave., SW Washington DC, RE: RIN 0560-AI31; Payment Limitation and Payment Eligibility; Actively Engaged in Farming Dear Sir: We, the undersigned organizations, appreciate the opportunity to comment on a proposal by the Farm Service Agency (FSA) to revise regulations on behalf of the Commodity Credit Corporation (CCC) to specify the requirements for a person to be considered actively engaged in farming for the purpose of payment eligibility for certain FSA and CCC programs. Section 1604 of the Agricultural Act of 2014 outlines specific considerations that the Secretary shall consider. These include the size, nature, and management requirements of each type of farming operation; the changing nature of active personal management due to advancements of farming operations; and the degree to which the regulations promulgated will adversely impact the long-term viability of the farming operation. Section Applicability We appreciate the challenge USDA faces in meeting the mandate of Congress to more clearly define what constitutes active personal management requirements for payment eligibility. In reviewing the proposed regulation we concur with USDA that family operations and landowner and spouse provisions be exempt from any additional management eligibility criteria and should continue to operate under current regulations. We agree that any proposed changes to actively engaged regulations will only apply to entities that are non-family general partnerships and joint ventures. However, we have concern that the strict definition of family farm does impact operations that are not solely comprised of lineal family members. While this definition is stipulated in the legislation, we would urge USDA to consider the circumstances where an eligible family operation becomes non-lineal based on the death or retirement of a parent, grandparent, etc. Therefore, we would urge consideration by USDA for grandfathering the family exemption for such operations comprised of family members that share great-grandparents. We believe it was not the anticipated intent of Congress to force such family farms out of eligibility as a result of family transitions and estate planning activities that are an important function for families to ensure the continued operation and viability of the farm. 1

2 Section Definitions Significant Contribution of Active Personal Management Current actively engaged regulations require that a contribution of management critical to the profitability of the farming operation is deemed significant. Report language in the Act provides examples of specific activities to evaluate significant contribution of management. We agree with the categories of management activities outlined in Section used to define active personal management, which include providing and participating in activities considered critical to the profitability of the farming operation performed in one or more of these categories: capital, labor, and agronomics and marketing. Each of these areas of management are inextricably critical to a farm s profitability. For this reason, we believe it is unnecessary and overly prescriptive to require a numeric based test for determining a significant contribution of active personal management. The proposed requirement of performing at least 500 hours of management annually or 25% of the total management hours required for the farming operation on an annual basis is arbitrary and will create unintended inconsistencies for applying such a measurement. The 25% requirement would be difficult to accurately determine for the vast array of diverse farming operations across regions, crop mixes, and management structure. The proposal for significant contribution to be on a regular, continuous, and substantial basis should be sufficient without the added complexity of a specific time measurement. The proposed regulation includes these practices as significant management activities. Therefore, if a non-family operation is required to meet a stricter management standard, a limit on the number of farm managers is unnecessary (discussed further in Section ). Specific to the new definition to determine significant contribution, the burden should fall to the operators to perform these significant individual or joint management responsibilities without the overly-burdensome requirement to keep management logs, spend a minimum number of management hours or a minimum percentage of total management for the operation. Such requirements and minimums are impractical and a resource drain for commercial-size operations. In the Joint Explanatory Statement of the Conference Committee (Managers report), the Managers state the section (1604) only authorizes a rulemaking to modify current regulations to add clarity and objectivity where this section specifically requires in order to better enforce existing law. The Managers report also states the Secretary will develop standards that are fair, equitable, and will enhance program integrity.and take into account the size and complexity of farming operations across different regions of the country. The Managers further note that the Secretary will look carefully at certain activities or services that a person may perform which have a significant impact on the long-term viability of the farming operation. Further, the Secretary is instructed to take into account the changing 2

3 nature of active personal management due to technological and economic advancements of farming operations. Finally, the Managers urge the Secretary to be mindful that stable, predictable and equitable farm policy is essential to the continued viability of commercial farming operations that need access to financing for annual production costs, equipment, and land. We believe for the regulation to be consistent with the intent of the Managers, it should not include a specific numeric standard for measuring a significant contribution of management activities. Applying such a metric to management activities is impractical and should not be viewed in the same manner as how FSA currently measures labor for purposes of eligibility determinations. Section Restrictions on active personal management contributions We strongly oppose USDA placing a limitation of the number of persons determined to be actively engaged by contributing management, referred to as farm managers. While the Act gives the Secretary the authority to place a limit on the number of farm managers, it is clear from the language in the Act and accompanying Managers Report that Congress did not require such a limit. In fact, the Managers noted that the regulation is required to take into account the size, nature, and management requirements of farming operations, the changing nature of active personal management due to advancement in farming operations, and the degree to which the impact of the regulation would adversely impact the long-term viability of the farm. Invoking an arbitrary limit on the number of farm managers completely ignores the geographic and crop requirements of different types of farming operations. While a family operation can have any number of farm managers as required to manage the complexity and scope of the operation, it is irrational to then limit the number of eligible farm managers in similar nonfamily operations. The size and scope of a diverse farming operation require different types of expertise and numbers of individuals to adequately manage such operations. A limit ignores economies of scale, the increasing need to achieve efficiencies in agricultural production, and the complexity of such operations. A related concern is that the rule may have unintended consequences for farming operations comprised of neighbors rather than family members. In some cases, neighbors work together in one operation in order to achieve and maximize economies of scale and allow the farmers to be more competitive, for example by receiving quantity discounts on various inputs. The proposed rule limits non-family operations to a maximum of three eligible farm program participants by being actively engaged in farming via contribution of active personal management to the farming operation. The second and third members are not automatically granted. Where they are granted, the recordkeeping burden on all three will be onerous. We are aware of situations where farmers have formed a general partnership with neighbors. FSA considers the partnership as the operating entity. While each partner is a family farmer, 3

4 the operation will not meet the definition of a family farm in the proposed rule and they will be held to a higher standard than other operations who are composed of solely family members. As the margins continue to tighten in agriculture, we believe more neighbors will work together in such operational structures to ensure economies of scale. We do not believe limiting this type of operation is what Congress intended when they required USDA to promulgate this rule. Further, the proposed regulation already provides for a more detailed, specific list of management activities to define active personal management. This strengthening of the regulation, along with the proposal to define significant contribution as regular, continuous, and substantial, should be considered as more than adequate to determine if a person or entity is actively engaged. As such, if a person or entity can meet these criteria, clearly indicating their substantial management role in the operation, then it is unnecessary and punitive to impose a limit on the number of managers. One of the questions posed by the proposed rule is whether there are certain management activities or practices that are unique to particular farming methods, crops, or regions that should be taken into consideration. We note the Map 1 accompanying the Costs and Benefits Analysis of the proposed rule, which indicates that 1,449 joint operations would not be exempt from the proposed regulation that have more than one manager. The greatest concentration of these farms are in the Delta, Southwest, and Far West regions. These are all areas located in the areas of the country that represent nearly the entirety of U.S. cotton, peanut, and rice production, and in many areas these are also highly diversified, irrigated crop farms growing other crops in addition to these three. These farms, by their nature, require significant management responsibilities to achieve the productivity and efficiency necessary to be sustainable farming operations. We believe the proposal to limit the number of manager s fails to take into account the required level of management activities for these type farms. We strongly urge USDA to revise the proposed regulation by removing the limit on the number of managers, particularly given the proposed new definition for what constitutes management. If USDA ultimately chooses to impose a limit on the number of managers allowed, we believe the limit should be increased to ensure it does not impact the significant amount of crop production represented by the farms that would be impacted with the current proposal of no more than three managers. Even the current proposal of up to three managers is in question as to allow three managers requires the farming operation to be viewed as complex by USDA, a term that is not well defined or explained in the proposed rule. If there is a limit on the number of managers, we believe the limit should be accompanied by a provision allowing for each state Farm Service Agency committee to waive or increase the limit in circumstances where the farming operation demonstrates the necessity of such management needs. Without providing some flexibility to accompany any proposed limit on the number of managers, USDA is ignoring the realities of today s production agriculture and the significantly evolving and advanced role management decisions make in the profitability and sustainability of farms. 4

5 USDA s own economic analysis of the proposed rule estimates 635 joint operations have more than 3 managers and are not exempt from the rulemaking. To help demonstrate the potential significance of policies that impact larger farms with greater management requirements and needs, the most recent USDA Census of Agriculture (2012) provides the following data: 3.8 percent of the 2.1 million farms account for 67% of U.S. agricultural production value. This means 81,660 farms are responsible for the production of two-thirds of the nation s food, fiber, and feed. While the economic analysis of the rule claims only a small percentage of farms will be impacted, the statistics above show that those impacted are also the farms contributing the greatest amount of production value. We also have concern about language in (e) clarifying that the significant contribution of a person s active management may be used only to enable one person or entity in a farming operation to meet the requirements of being actively engaged in farming. For liability or other purposes, a non-family manager may need to spread their management contributions over more than one entity. As long as the contribution meets the more restrictive test as prescribed in the rule, there is no need to limit the contribution to one entity. Also, we are concerned about the application of this provision for family operations which may have common family members in different entities such as corporations or limited liability corporations (LLCs). In the case of LLCs, the spouse exemption for a husband or wife would be circumvented in cases where the couple are members of two LLCs in a partnership for legal liability purposes. The spouse s contribution of management could be limited to only one LLC, which we contend violates the tenet of the exemption from this regulation. Conclusion In summary, we concur with the exemptions of this regulation for family operations and would recommend some consideration for eligible operations that subsequently become non-lineal. While we can support additional clarification of significant management requirements for nonfamily organizations as recommended by Congress and outlined in the proposed regulation, we strongly oppose any limit on the number of persons who can qualify under the management requirement. We also oppose the requirement for management record-keeping logs and minimum hours or percentage of management activities. We oppose the application of one entity management qualification per person. Implementation of the proposed regulation as written would lead to expensive, burdensome and unnecessary reorganization by commercial operations and impact the long-term viability of farming operations. It would also place excessive and unnecessary record-keeping requirements on persons responsible for the profitable operation of such farms. We believe this was not the intent of Congress. 5

6 In addition to these comments, please find attached as an addendum examples of existing farm operations that would be impacted by provisions of the proposed rule, specifically the limitation of no more than three managers. We ask that the addendum be made part of the record, along with these comments. We appreciate the consideration of these comments in the finalization of this regulation. Sincerely, American Farm Bureau Federation American Society of Farm Managers and Rural Appraisers National Cotton Council Southern Peanut Farmers Federation USA Rice Federation Western Peanut Growers Association 6

7 Addendum Commercial Farming Operation Examples Example #1. A commercial farming operation in Arkansas is comprised of 16,000 acres of cotton, wheat, rice, soybeans, corn and grain sorghum. It is operated by 3 on-site, non-family managers who also qualify their spouses under the spouse management provisions, thus equaling 6 eligible payment entities. The 3 managers provide all day-to-day operational management functions on divisions of this operation. Management activities include variety and crop mix selection, supervising assistant managers, irrigation and drainage work, machinery operation, planting, cultivation and harvest functions. They provide input on financing and marketing decisions as well. Based on the proposed rule, this operation would be reduced to two, possibly three management contributions depending upon the designation of a complex operation. Example #2. A commercial diversified farming operation partnership in Alabama is comprised of 5000 acres of cotton, corn, wheat, soybeans and pumpkins. The partnership consists of a father, 3 sons and a first cousin. All managers are on-site and perform collectively or separately all necessary management functions. These tasks include but are not limited to: planting, cultivating, harvesting, FSA and NRCS compliance, input management, marketing, labor management, field operations, maintenance and grain handling. Because this partnership is a non-lineal family operation it is by definition non-family and subjected to the proposed restrictions of two and possibly only three management contributions. By any rationale, other than the restriction of being solely lineal family, this is a commercial, diversified family farming operation that includes on-site management. Example #3. A large commercial, diversified farming operation in the Cotton Belt is comprised of 15,000 acres of cotton, corn, soybeans and wheat. The day-to-day management responsibilities are carried out by 15 non-family single person LLC s. Separate management functions provided by different individuals include supervision of: entire operation, grain production at one of three main locations, chemical applications, cotton production for one location, financing and purchasing, cotton harvest at one location, risk management, cotton harvest at another location, irrigation furrow and pivot at multiple locations, grain production at one location and evaluation of information and technology, grain harvest at one operation and marketing cotton, grain harvest for one operation and furrow irrigation equipment for another operation; irrigation at one operation and acquiring technical information, selection of seed varieties and marketing of grain, pesticide consultation and fertilizer applications, financing, monitoring insect control, money management, farm program compliance and industry participation. Under proposed regulations, only two or three would qualify as managers. 7

8 Example #4. A diversified Georgia farming partnership is comprised of 3,000 acres of irrigated cotton, peanuts and corn. The partnership consists of a father, daughter, and two non-family individuals. All provide shared management responsibilities for the day-to-day operation of this farm including: planting, field work, harvesting, crop mix and varietal decisions, labor management, irrigation, grain storage management, financing, marketing, recordkeeping and government program compliance. If the proposed rule is implemented as written this commercial farming operation with on-site managers would be arbitrarily limited to two and possibly three managers for eligibility purposes. 8