African Rice and More on Payment Limitations

This story is interesting for its treatment of the economic and social risks that many producers in the world take.

Below, please find a conversation regarding payment eligibility. It builds upon my earlier post:

Commentator's First Comment:

I would like of offer a couple of points that I believe you missed in your commentary on the new payment limitation rules. First, there is much more that USDA can do on actively engaged. It is simple and has precedence in the IRS material participation standard for determining whether income is passive, or whether the taxpayer material participates in management. It requires 1,000 hours or 50% of the tax[payer's commensurate share, whichever is less. It is simple and it is the same standard USDA uses for labor in determining whether a taxpayer is actively engaged in farming. I do belieive the statute would allow a combined test to the extent the test was the same for management as for labor (1,000 hours or 50% of commensurate share). I beleive an acceptable legal reading of "labor or management" would be labor and/or management, so that if it was 1,000 hours, a person could qualify with 500 hours of labor and 500 of management.

GAO and the payment limitation commission both recommended a measurable objective standard. That is the "more" that can be done. The proposed rule is very weak. If I as a partner have lead responsibility among partners to review quarterly financial statements (each quarter) my participation is distinct and regular. This is just a new set of rules to manipulate. It is not real reform. USDA has all the authority it needs to do real reform, as stated clearly in the GAO report on the actively engaged in farming rules.


My Response:

Glad to hear your thoughts. I admit, my commentary was incomplete. I do not, however, think that the statute would allow USDA to tell someone that he can't get payments because he didn't do both labor and management. If I labor, I am actively engaged. If I manage, I am actively engaged. Some have called for the rules to require both (not just allow the provision of both to satisfy the active-engagement requirement). I don't the statute allows that. I would agree that the statute likely gives enough flexibility for USDA to say that combinations of labor and management are enough.

I would agree that the regulations regarding management can be strengthened to require some minimum amount of time. In the end, however, I'm not sure this does much. How do I prove that I spent the requisite hours managing my farm. Is it time I spent thinking? I don't have a time card or keep track of billables on the farm. Maybe the rules should require that I do that? That, in turn, opens up the possibility that a county committee with an ax to grind could cause problems for a farmer doing things they don't like, or that a supposed farmer can fake it. In the end, the call for manageable objective standards is a great thought, but extraordinarily difficult to implement in any sort of a way that identifies anyone as ineligible. That's why the former rules used a qualitative standard. I'm not sure a quantitative one works much better, practically speaking. Indeed, one common criticism I hear about the farm program is "It makes liars out of us." I wouldn't go that far, but implementation and verification are important aspects of any rule. And, if that is what you are getting at with the "1000 hours / 50% of the commensurate share of the management" requirement, I'm not sure that it isn't subject to the same manipulation that plagues the current rules.

Qualitative standards are problematic because they involve some judgment calls and the application of standards. "Critical" is subject to application and the proof that would go into it would probably involve bringing in evidence of the decisions that the farmer made (regardless of how much time the farmer spent making those decisions). That too is subject to manipulation by government or by farmers.

My main concerns with the present rules has to do with spouses. I basically think that the statute is written in a way that would allow all married farmers to double the payment limit (i.e., the spouse doesn't have to make any right hand contribution). Was that anticipated? What are your thoughts on allowing changes to way one reports their operation in light of these new rules (e.g., what if my spouse never claimed payments before, can she now or do we need to acquire more land)?


Commentator's Response:

I agree that USDA could not require both labor and management.

Yes, the opening up on the spouse rule was deliberate. It was part of creating a facade of reform that had almost no impact.

Prior to this year, you could double by using either the spouse rule or three entity - but you could not use both to recieve three or four times the limit. It was one or the other.

By requiring direct attribution, Congress said only the spouse rule could be used to double and then made it automatic so all married farmers qualify. They wanted to create the appearance of reform while affecting almost no one.

[According to] EWG records. In most major farm states there are 1-5 (typically 1 or 2) umarried farmers who were getting over the limit and will now get less.

The quantative test is easy to cheat a little but not a lot. If you have a full time job doing something else and never visit the farm -- which is the case with many phony partnerships . . . -- you will have a hard time convincing anyone you meet the test.

Headlines and Proposed Rulemaking

Headlines are here.

There are a wealth of new rulemakings out there, and USDA has extended the payment eligibility effort for another 60 days. Here is a note I received from Tom Reddick regarding the others:

------------------------------------------------------------
Farm Bill Program Regulations Released
------------------------------------------------------------
Last week, USDA released several conservation program
regulations that reflect changes made in the 2008 Farm
Bill. The list of newly released regulations includes
Environmental Quality Incentives Program (EQIP), Wetlands
Reserve Program (WRP), Wildlife Habitat Incentives Program
(WHIP), Farm and Ranch Land Protection Program (FRPP),
Healthy Forest Reserve Program (HFRP), Technical Service
Providers (TSP) and the Grasslands Reserve Program (GRP).
The regulations are effective immediately, but NRCS will
take comments and recommended changes over the next few
weeks.

The 2008 Farm Bill alters some operations of these programs
and creates new opportunities for conservation districts.
The NACD Legislative Committee will review the regulations
and develop comments to submit to NRCS. NACD encourages
state associations and districts to do the same.

Deadlines for submitting comments are as follows:
* Comments on the Healthy Forest Reserve Program are
due by February 13, 2009;

* Comments on the Environmental Quality Incentives Program
and the Wetlands Reserve Program are due by March 16, 2009;

* Comments on the Wildlife Habitat Incentives Program, the
Farm and Ranch Land Protection Program and the Technical
Service Provider Assistance are due by March 17, 2009; and

* Comments on the Grasslands Reserve Program are due by
March 23, 2009.

Additional information on the regulations can be found on
the NRCS website at http://www.nrcs.usda.gov/. To view
NACD's previous comments to NRCS and USDA regarding Farm
Bill program regulations, go to
http://nacdnet.org/policy/agriculture/farmbill/ .


------------------------------------------------------------
Request for Proposals Released for Agricultural Water
Enhancement Program
------------------------------------------------------------
NRCS recently released a request for proposals for the
Agricultural Water Enhancement Program (AWEP) under the
2008 Farm Bill.

AWEP is a new sub-program of EQIP that addresses
water-related issues on a broader scale than individual
contracts. Activities may include water conservation
restoration or enhancement projects, irrigation efficiency
or improvement projects, drought mitigation and water
quality plan development. As specified in the law, funding
under this program will be for producer/landowner specific
contracts, not project administration. Producers may
participate individually in AWEP or collectively through a
partnership project. NRCS expects $58.4 million to be
available for AWEP in fiscal year 2009.

States and conservation districts that are interested in
working with producers on these types of water-related
partnership projects should submit proposals directly to
NRCS to utilize available funds. Proposals are due by
March 2, 2009. Additional information can be found at
http://www.nrcs.usda.gov .

As well as the following:

LPE Learning Center Information on
EPA Emissions Reporting for AFOs - Large CAFOs May Need to Report under
EPCRA

On December 18, 2008, the US EPA published a final rule that clarified
which livestock facilities must report air emissions from their
facilities. The two laws of interest in this are the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) and
Emergency Planning and Community Right to Know Act (EPCRA).
Animal agriculture was granted an administrative exemption from
reporting air emissions that normally occur from raising farm animals
under CERCLA. Additionally, farms that are not large Concentrated
Animal Feeding Operations (CAFOs) according to NPDES permitting rules,
are exempt from reporting under EPCRA. Previous drafts of the rule had
essentially created a complete exemption for reporting air emissions
from animal agriculture, so this rule came as a complete surprise to
many producers, industry representatives, and those who advise
producers.

The rule is effective on January 20, 2009. Large CAFOs may face
increasing liability for non-compliance following this date.
The Livestock and Poultry Environmental Learning Center Air Quality team
has assembled information about this rule including determining
responsibility, estimating emissions, and making a report.

What is Agricultural Law

As referenced in previous posts, the Agricultural Law section of the Association of American Law Schools (AALS) met to discuss the pedagogical and scholarly value of agricultural law, considering as well what belongs in the canon of agricultural law.

I just posted my written remarks on my SSRN site and welcome comments. These remarks will be published next month in the American Agricultural Law Association's newsletter, The Agricultural Law Update. The article discusses agricultural law in the context of the contemporary law school curriculum.

My thanks to section chair Professor Anthony Schutz and co-panelists Professor Drew Kershen and Dean Jim Chen for sparking the discussion that inspired my thoughts. Pictured here are Jim and me as we prepare to deliver our remarks.

Headlines

Headlines

NE Headlines

Roundup

Here are the Nebraska Headlines from 1/6/2009 and 1/8/2009.

Here is Ross Pifer's update.

AALS Conference Wrap Up

The papers presented by Professor Kershen and Professor Schneider will be published in forthcoming issues of the Agricultural Law Update, available from the AALA. Below, I've included a set of opening remarks that I refrained from giving at the last minute in the interests of time. These were adequately covered in the meeting by the panelists, but I think they may have some value as a recap. After that is a question I received via e-mail from an audience member and my response.

Read the rest of this post . . . .

I believe agricultural law takes the agricultural sector and identifies laws that are unique to the sector or which are unique in their application and examines them. And I think we all agree about that general aspect of the cathedral. To the extent law school and legal scholarship are exercises in using and understanding law, then, this provides at least three pedagogical virtues.

1. The first is a general observation of any law school course and pertains chiefly to students. It develops a law student's legal abilities by working with manageable chunks of law that are, by necessity, cabined into an artificial space that we call a course (like contracts, torts, property, land use, environmental law, etc.).

2. But ag law is somewhat less artificial in its segregation from the rest of the law. That is, it is organized around a particular segment of the world from which we all gain access to food, fiber and fuel. That unifies the area in a way that is different from many other areas. Some courses take a similar tact, including space law, sports law, etc. In the context of a traditional law school curriculum, some refer to these as "capstone" courses, wherein the students understanding of many legal areas are honed in on an application of law to people as people experience it. Only lawyers, after all, see the law as criminal, civil, property, and tort. People see the law experientially, which may mean that agricultural law provides a valuable insight into how we should think about law in more dynamic ways (perhaps juris dynamically). This exercise is valuable to law students as well as scholars.

3. Aside from the dynamic nature of the area, it also provides a wonderful setting for real interdisciplinary work. Agricultural law has always involved economics, but it can and often does involve many other disciplines. This, in turn, helps us to better understand the facts upon which agricultural law operates, the consequences of legal change, and the need for such change. This is valuable both to the scholar and to the student.

Given these virtues, practical questions arise in the context of teaching agricultural law. There is, quite simply, a tremendous amount of law here and even more policy. So I'm interested in getting some input from our panel as to what law they view as the core aspects of agricultural law and what role they give policy in their courses. I've posted on the aglaw blog about how I view policy in the classroom (as secondary but necessary to the study of law), but my views on that are continually changing.

There is, of course, no single way of approaching this question of finding the core of ag law. For instance, some may think in terms of the basic themes of the discipline (e.g., striking a balance amongst certain interests, achieving a certain goal, etc., which may be where policy fits) while some may think along practical lines (e.g., what does the lawyer in a rural agricultural area encounter) and still others may think along other lines. But in the end, I suspect what will emerge are views about what general themes exist and what areas of law are the foundation for developing those themes.

The panelists' discussion did not do much to identify the core legal areas of study, but a fascinating discussion of agricultural law and its evolution over the years ensued. Professors Kershen and Chen took the lead in this regard. Professor Schneider provided a helpful analysis of the virtues of agricultural law and the criteria by which one should go about selecting materials for a course. I believe the entire proceeding will be available as a podcast at some point in the near future.

I received the following question from an audience member via e-mail after the panel discussion. My attempt at an answer follows:

I heard two types of claims on the "what is ag law" issue. First, there were claims that ag law included everything: labor law, antitrust, commercial law, everything. If this is really the case, then there is no ag law, only law. It would be as if someone compiled a bunch of railroad accident cases to talk about law and legal process. The compilation would be about law, not railroad-accident law.

On the other hand, there were all these complaints about how ag law wasn't included in the employment law texts, the commercial law texts, etc., because of all the special exceptions for, and special treatment of, agriculture. Now here you have something. Doesn't it make sense to try to define ag law as the special law that fits within those gaps.

A quick aside. The first chapter in our employment text is called "boundaries" and it deals with this issue. But we deal with this throughout the book and the type of analysis I allude to above works well for employment law. Clyde Summers from Penn has written a couple classic articles complaining about how all the normal contract and tort laws don't apply in employment cases. So there you go. Employment law consists of those special contract and tort rules that apply only in employment cases. If those rules ever become the same as general tort and contract rules (and that's the trend with the gradual demise of employment at will), then, poof, there won't be any "employment" law of contracts and torts, only contract and tort law.

My Response:

I think you are right in your conception of how one might envision a separate doctrine of ag law. I tend to wonder, however, whether the first claim would mean there is no ag law. Under a traditional paradigm, I suppose that is true. It would not, however, mean that the course lacks value. A good experiential-based model would place students in a setting where the lawyer must choose between and utilize many different areas of the law. This would, I think, constitute a capstone course—one in which rules that the students have already learned are utilized in a course that is unified only by the factual setting to which many different legal areas would apply. To me, the absence of a unique body of law (legal rules that differ for these particular actors) doesn’t necessarily mean that no value exists in such a study. After all, it could give us a fairly cohesive set of stories that illustrate the variety of legal problems that a client may bring to a lawyer’s door.

Ag law is different because there is a wealth of unique law. But the railroad example could be too. If one were to, for example, develop the railroad cases as a method of examining how many different legal questions arise within the railroad industry, then a decent capstone sort of experience emerges. But once this goes beyond the accident cases, one would find that the railroad industry experiences the law in ways that raise a host of legal questions, some of which do not involve unique law and raise unique policy concerns (though perhaps a course in public utilities would cover that ground).

I agree, however, that the presence of unique rules in a given area is an important part of defining a distinct area worthy of study under a traditional this-is-not-like-other-law paradigm. And ag law does have that. I would not take that to mean that the application of legal rules that aren't unique to the area must be omitted from coverage. But, as emerged from our program, choices have to be made. And in the law school curriculum such an omission may be compelling (though, I don’t think, unhelpfully duplicative).

The reason I resist the notion of uniqueness as the only way of defining a subject is that, on a broader level, perhaps contract, tort, and property don't necessarily have distinct boundaries either. If that is true, then many of the lines that we draw to manage course content are at least somewhat artificial. Further, if this sort of line drawing is artificial, then I suppose the best way of thinking about defining subject areas is to think about the utility of approaching the law in a certain compartmentalized frame. I think there might be value to approaching law with a subject that is bounded by the factual settings that arise (true capstones), rather than by unique legal rules. But the presence of unique legal rules surely has content-delivery value.

In the end, I think agricultural law has a hard time fitting into some notion of a capstone course. Given all of the legal rules that constitute unique treatment, or at least aren’t discussed elsewhere, it really does bring a distinct body of law to students. And when one considers the need to cut something, it makes sense to omit those subjects that are adequately covered elsewhere in the curriculum. As I reflect, I tend to do that with subjects like nuisance law and zoning, but I retain coverage of things that are not covered anywhere else in the curriculum. That means that agricultural law is not, strictly speaking, a capstone course. The common factual setting (which exists only in a very loose sense) serves not to simply create the opportunity to study how legal rules taught elsewhere in the curriculum practically operate. Rather, the legal rules that apply are also unique. Though, as Susan has explained elsewhere, perhaps that uniqueness is waning in some areas.

Dairy Farming - One of the Worst Jobs in America

At least according to cnbc. The photo is a silly representation of the modern dairy industry, but if the data are correct, then I wouldn't want to be a dairy farmer. And I understand why my father got out of that business in 1987.

Update: The photo has changed from an earlier one depicting a woman with a five-gallon bucket apparently attempting to milk a cow by hand in an open-air lot.

Soil Loss, Perennial Crops, and the Future

Wendell Barry and Wes Jackson have this op-ed in the New York Times, calling for longer term policies in the ag sector.

AALS Events to Attend

The Agricultural Law Section meets on Friday, January 9th, at 8:30 AM, in Cardiff, South Tower/Level 3, San Diego Marriott Hotel & Marina. Here is the program description:

The program this year will focus our section's attention on the definition of agricultural law. The program has two related goals: (1) consider the pedagogical and scholarly value of agricultural law, and (2) identify what belongs in the canon of agricultural law.

Given the various changes that the agricultural sector has undergone over the last twenty-five years, it is time to reconsider the roots of the subject matter to which our section is devoted. In addition to the panelists, the section hopes that those with an interest in agricultural law and experience teaching it will attend the meeting and participate in the discussion.

Business Meeting at Program Conclusion.

I've also received the following from Professor Chris Holman, which I happily pass along:

June Carbone, Chris Holman, and Andrew Torrance have organized a "Biolaw" panel at this year's annual AALS meetings which will focus on the intersection between Intellectual Property and Biology.

It will take place on Wednesday, January 7th, from 3:20-4:20 in Laguna, South Tower/Level 1, San Diego Marriott Hotel & Marina.. The panel is entitled The Two Halves of Biolaw (Behavioral Biology and the Law of Biological Innovation), and will feature Dan Burk, Oliver Goodenough, Mark Janis, and Mark Lemley.

In addition to our distinguished panel, we will be soliciting signatures from attendees to form an official "Biolaw" section at AALS.

We have also organized an open program on Biolaw that will take place on Friday, January 9th, from 1:30-3:15 in Del Mar, South Tower/Level 3, San Diego Marriott Hotel & Marina. During the open program, we will discuss the creation and organization of the "Biolaw" section.

We hope all of you are able to attend one or both of these Biolaw events, and that you will add your support to the formation of the Biolaw section.

Enjoy the programming and I hope to see you in San Diego.

Defending the Potato

Pity the poor, misunderstood potato that has become the symbol of our inactivity and downright laziness. How inappropriate!

Consider instead that we just completed the International Year of the Potato, and just last month, the FAO released a 144-page illustrated book, New Light on a Hidden Treasure, which records the achievements of the celebration and promotes its message that "the potato is a vital part of the global food system, and will play an ever greater role in strengthening world food security and alleviating poverty." The book, available for free download in six different languages "introduces the Year's guest-of-honour, Solanum tuberosum, the 'humble tuber' that spread from the Andes across six continents and changed the course of world history. The review also provides the most recent FAO statistics on world potato production and consumption, and profiles of 52 major potato producing countries."

FAO reports that "[t]he International Year was observed around the globe in scientific conferences, growers' congresses, festivals, cooking contests, art exhibitions and school projects. The book presents highlights of those events, as well as the winning entries in the IYP Global Photography Contest." The book "concludes with viewpoints gathered from some of the world's leading 'potato people' – those whose daily work with the potato has become a passionate way of life – and an overview of prospects for potato development beyond 2008.

BTW, the couch potato picture was lifted from the OverTheLimit news blog. The blog post is captioned, "Off the Couch and into the Gym," and it reports that "the most common New Year resolution is to promise yourself to start going to the gym and taking care of your health and body." While it also notes that most resolutions are left by the wayside by early summer, it suggests that this year may be a particularly good time to try it again. Many gym memberships are available at a discount because of the recession.

According to the FAO fact sheet, "[t]he potato is a good source of dietary energy and some micronutrients, and its protein content is very high in comparison with other roots and tubers. Potato is low in fat - but preparing and serving potatoes with high fat ingredients raises the caloric value of the dish."

Admittedly, potatoes do not move a lot, but then again, neither do most other vegetables.

Regulations Open for Comment and Some Observations

New regulations concerning payment eligibility and limitation are open for comment until January 28, 2009. The notice regarding the "interim rule" that "will apply to 2009 and subsequent crop, program, or fiscal year benefits" can be retrived here (search for volume 73, page 79267) or here and states that the rule is already effective, "but subject to modification after the consideration of comments." Under Section 1601 of the bill, it appears that an interim rule is all that is required.

Click on "Read the rest of this post . . . . " for a primer on the changes, a somewhat lengthy discussion of how the eligibility rules have changed, and my take on some problems that they pose. This link and this link are also contained below. They are markups of the amended statutes.
Read the rest of this post . . . .

AGI CAPS

First, there is no average AGI limit (indeed, none of the part 1400 regulations apply) to marketing assistance loans or LDPs. The AGI limitations have been reduced somewhat for other programs. If a person or entity has an average AGI of $500,000 or more from non-farm sources, no direct, counter-cyclical, or ACRE payments are allowed. The regulation's reference to "program payents or benefits as identified in 1400.1" is quite imprecise, 1400.500(b), but it would appear that direct, counter-cyclical, and ACRE payments fall within this reference.

Notably, the AGI limitation for conservation-related payments is twice that for other payments - $1,000,000 - but it does not apply if at least 2/3 of the person or entity's income is farm income. And the whole requirement can be waived by FSA on a case-by-case basis. To me, this makes some sense. If we are purchasing environmental services from farmers through this program, then it is not at all apparent that the income of the seller should matter. Of course, if we are running a welfare program for farmers under the guise of environmental programs, then income should matter.

The limit on farm income (which could apply to entities that do or do not exceed the non-farm income limit) is an average AGI of $750,000 but it only eliminates the producer's ability to get direct payments. The regulation allows this limitation to apply to "other payments made applicable by statute or regulation" but I am unaware of any such payments. Overall, this is a weak and extremely narrow cap, and there has been some talk of further strengthening the limits. Of course, access to income data is necessary to ensure compliance.

There is some opportunity to structure operations to isolate the AGI of a person at acceptable levels. Spouses, for instance need not file separate returns. As before, the statement of an accountant or a lawyer is enough. 1400.501(c)(2). With regard to structuring entities to get an average AGI to an acceptable level, there are two main restrictions. One is contained in 1400.501, which deals with the calculation of the 3-year average AGI. Under the regulation, paragraph (d), a new legal entity will not be regarded as "new" (thus entitling it to a new AGI calculation on a new base period) "to the extent it takes over an existing operation and has any elements of common ownership or interests with the preceding legal entity, or with persons or legal entities with an interest in the "old" legal entity." "When there is such commonality, income of the "old" legal entity will be averaged with that of the "new" legal entity for the base period." In other words, simply forming a new entity is not enough to get a new AGI calculation. However, as the years progress and the base period covers different three-year base periods for the new (but old) entity, the average AGI should come down.

The second limitation on structuring is 1400.503. Basically this provision reduces an entity or joint operation's payment commensurate with the ownership interest of any person or entity that itself exceeds the AGI. Thus, an owner who exceeds the AGI does not make the entity ineligible, but it does reduce the entity's payment commensurate with the ownership interest. As with direct attribution, the tracking of AGI-violating owners only extends to the 4th level of ownership. If an entity or partnership is found there, that ownership results in a reduction of the payment, regardless of whether the entity's average AGI exceeds the limit or not.

SPECIFIC PAYMENT LIMITS

Insofar as specific payments are concerned, the amount of payments each individual or entity can receive is set forth in the bill and regulations for direct payments, counter-cyclical payments, and paymetns under ACRE, SURE, CRP, GRP, WHIP, WRP, NAP, TAP, CSTP, and EQIP. No payment limitation applies to marketing assistance loans and LDPs. Further, payments to entities are attributed to the owners of the entity. So no person should ever exceed the one-payment limitation. However, spouses are now generally regarded as separately eligible and can therefore receive their own payment. So the economic unit of husband and wife will generally get two payments.

ELIGIBILITY

As the spouse provision noted above indicates, the more interesting (and challenging) changes are those dealing with payment eligibility. The combination rules of old are gone. Now that the regime is one of direct attribution that recognizes both individuals and legal entities, there is no need for complex person determinations (though separate and distinct requirements remain). And without the three-entity rule, the incentive to create more persons is eliminated. General partnerships and joint operations are still not regarded as eligible for payments, but rather are conduits through which individuals and entities may satisfy the eligibility criteria.

So there is some simplification that attends these changes. There is, however, still much complexity and the time for comments is short. Thus, I provide a few observations regarding the changes below, with somewhat crude citations to the interim rule. If you are in this business, I urge you to study the regulation and provide comments to make these regulations better.

The general notion of being "actively engaged in farming" has not changed dramatically. The general rule is still one of left-hand [capital, equipment, or land] and right-hand [labor or management] contributions, with overall contributions that are commensurate and at risk. 14oo.201. The notion of "at risk" has now expanded to the phrase "at risk for a loss, with the level of risk being commensurate with the person's or legal entity's claimed share of the farming operation." 1400.201; see also 1400.7.

However, there are some more significant changes within the general rules. 1400.201(c) now provides a list of criteria to take into account in determining whether a person or legal entity is "independently and separately contributing a significant amount of [inputs] to the farming operation." And the definition of active personal management has much more detail than before. 1400.3. Some objectors have been complaining that this is not enough, but I do not know what more can be done. Those who object based on the idea that both management and labor should be required in order to qualify as actively engaged have not read the statute. Here is a markup of the statutory change that I used in my class. The .doc displays best in draft view. 7 U.S.C. 1308-1(b)(2)(A)(i)(II) (new and old) clearly uses the disjunctive. I don't think a regulation to that effect could be written given the statutory language. The same is true of requiring landowners to contribute something more than land. The statute just doesn't allow it. 7 U.S.C. 1308-1(c)(1) (new and old).

As before, there are specific rules for AEF determinations regarding persons (which are now only individuals) 1400.202, joint operations 1400.203, entities 1400.204, and so on. Notably, the financing rules have been moved to these sections of the regulations, and they are somewhat cleaner than they were before. Specifically, the financing rules no longer contain different rules depending upon whether the financed contribution is claimed as a "significant contribution" or a mere contribution that should count for commensurate share purposes. Rather, the rules seem to indicate that all contributions (not just the ones claimed as significant for left-hand side purposes) must be financed properly. See, e.g., 1400.202 (c). And it also appears that loans amongst or secured by others involved in the operation are always allowed (not just for commensurate share purposes) so long as the loan bears the prevailing interest rate and has a reasoanble and customary repayment schedule. 1400.202(c)(2). The rule is poorly worded, but that is my reading of it. If this is right, the "split-note" solution to financing rule/commensurate share problems is no longer necessary.

Notably, leasing is not covered by these modified and relocated financing rules, rather the definitions of equipment and land (as before) provide that such items may be leased from any source. If land is leased from a person or entity "with an interest in the crop or crop proceeds", it must be leased at fair market value. If equipment is leased from a person or entity "with an interest in the farming operation", then it must be leased at fair market value. I do not know why the drafters used different language, but the language chosen for equipment appears to identify a broader set of lessors.

Landowners who contribute owned land to an operation and do not cash rent it are still, by definition, actively engaged. And cash rent tenants still have special rules that they have to satisfy concerning either labor or management and equipment. 1400.301. Notably, the rule has been changed to clearly state how it applies to joint operations and entities that are cash rent tenants. As discussed below, the changes accompanying entity activation may make the cash rent tenant rule problematic for some entities. Notably, there was no statutory change that spurred this rule change. See the markup here. 7 U.S.C. 1308(f)(4) (new); 7 U.S.C. 1308 (e)(4) (old).

Perhaps the most significant changes deal with spouses' and legal entities' status as actively engaged. Spouses of people who are actively engaged are by statute and regulation deemed to provide a significant contribution of labor or management with regard to that farming operation. 1400.202(b). One should still worry with individually qualifying spouses about whether this imputed contribution must be accompanied by a left-hand contribution. There is, however a one-handed rule that appears to shield such spouses from the left-hand side contribution. The adult family member definition and one-handed rule provides that in family-operated operations, adult family members (which include spouses) need only provide the right hand side contribution. 1400.208. So it would appear that spouses within farming operations "conducted by persons, a majority of whom are family members" are eligible for payment, assuming they meet the commensurate share and at risk requirements. It is not clear, however, whether 1400.208 and 1400.202(b) operate together. And, practically speaking, the commensurate share and at risk requirements would counsel in favor of providing the spouse with left-hand side contributions to balance the claimed interest.

It would also make sense to place spouses in a joint operation and have the joint operation provide the left-hand side contributions under 1400.203. Again, however, it is not entirely clear that 1400.202(b) imputes a significant labor and management contribution to the spouse. One option may be to form a general partnership but claim eligibility as individuals under 1400.202, which would necessarily make 1400.202(b) operable. It is unclear, however, whether the left-hand contributions of the partnership would track to the owners in a 1400.202 context. One remedy would be to provide at least one left-hand side input (e.g. equipment) at the individual level, but the remaining contributions could still run afoul of financing rules. In the end, some clarification on how 1400.202(b) relates to other regulations is desperately needed. This need is also apparent with regard to spouses within entities.

Entities are no longer activated by right-hand side contributions from at least 50% of their owners. Now EACH owner must provide a "contribution" of active personal labor, active personal management, or combination of the two. 1400.204(a)(2). Notably, statutory change did not require this regulation. The statute continues to read "collectively make." 7 U.S.C. 1308-1(b)(2)(B)(ii) (this cite is the same for both the old and the new versions). That contribution must be performed on a regular basis, identifiable and documentable, and separate and distinct from the contribution of other owners. It must also be "significant and commensurate". 1400.204(a)(3). But the regulators were not too strict. That is, a passive investors does not totally disqualify the entity from receiving payments. Rather, it results in a reduction in the entity's payment "by an amount commensurate with the ownership share" of the passive investor. So the entity relying on the prior 5o% quantum of owners to activate itself may find that it can only get half a payment.

This new requirement poses other problems in the context of cash rent tenants, spouses, or both.

First, the cash rent tenant rule further complicates this new requirement. If cash rented land is involved, the entity may find that it does not satisfy the cash rent tenant rule. That rule simply cross references the each-owner requirement to activate the entity (1400.204(a)(2)) and demands compliance with it before the entity can be eligible for payments on cash rented land. 1400.301(e). Thus, it may be that a passive investor will eliminate the ability of an entity to satisfy the cash rent tenant rule.

Second, how the spouse rules and the entity rules work together is a problem that is not set forth in the regulation. The problem is further compounded by the presence of cash rented land. Suppose, for example, that a corporation is owned by Husband and Wife, 50-50. The entity rents all land (thus no landowner rule applies), provides all the capital and equipment. Husband performs active personal labor and active personal management. Wife provides no right-hand contributions. Does the rule imputing such a contribution to Wife, 1400.202(b), qualify the entity to receive a full payment, or a half payment if Husband has otherwise met his payment limitation? Does it thereby also fulfill the cash rent tenant rule? It may, but it may not. If not (and perhaps if so, if enough land is involved to get beyond one payment limit), then Husband and Wife would be better off dissolving the entity and operating as a joint operation with the left-hand side contribution made either at the partnership level or individually because (at least if they are qualifying individually) the imputation of labor and management would apply.

That is all I have for now. For practitioners in this arena, comments to USDA are an important part of the rulemaking process (as odd as that process is with these rules), so please offer your thoughts to USDA. And I would be happy to hear how others are reading these rules.

WSJ on Food and Agriculture: A Contrast in Families

On December 30, the Wall Street Journal published an article evidencing the complex policy challenges facing agriculture and world food production. A striking contrast was presented in the article Two Families' Shifting Fortunes, a story of two families that exemplify the food crisis in Ethiopia and the prosperity experienced by many in China. As the article notes, "[a]lthough the world is producing more food than ever before, a tug on one link of the food chain can still rattle others far away." The two-year old Chinese child in Bejing, sitting with her grandfather at a restaurant before "plates of pork, chicken, beef, and duck" is in sharp contrast to the one year old Ethiopian child in a food line with his mother.

Growing demand in one corner of the world has complicated consequences elsewhere. To feed its voracious appetite for pork and other meats, China bought a record 490 million bushels of U.S. soybeans - mostly to feed to livestock - during the year ended August 31, or about 18% of the harvest. The squeeze on soybean supply forced prices higher. That had a impact in Ethiopia, where soybeans are a crucial ingredient, along with corn, in a special mixture fortified with micronutrients for malnourished children.

While the problems of agriculture and food production in Ethiopia are far more complicated than the world's demand for more and more meat, the article reveals a very personalized picture of the global give and take.

The WSJ provides a video summary of the Ethiopian dilemma.