What Is a Deficiency Payment?

A deficiency payment is a direct grant to compensate farmers for the difference between a guaranteed price and the actual market value of a commodity. Such payments are available for producers of a limited number of commodities in some nations. They ensure that farmers continue to produce crops of critical importance even when the market price drops, as they are guaranteed a base price. This makes it feasible to continue production rather than replacing the crop with a more profitable alternative. Provision of deficiency payments can be somewhat controversial in some regions.

Under this system, the government generates a list of commodities it believes are important, like corn, wheat, and rice. It establishes a baseline guaranteed price, based on market factors and other conditions. When the crop is ready for market, if farmers cannot get that price, they can apply for a deficiency payment. This compensates them for the difference between the actual sale value of the crop and how much they would have earned if they had received the guaranteed price.

Some governments also provide temporary loans at harvest time. These allow farmers to retain ownership of a crop long enough to allow prices to rebound from the lows that typically develop when the market is flooded as farmers bring in the harvest. This is often funded through the deficiency payment program, or is closely associated. It provides an incentive for farmers to continue growing crops covered under the program, to ensure availability for the general public.

To receive a deficiency payment, a farmer usually needs to meet some standards. These include proof that the crop was produced, with documentation on the sale price and circumstances of sale. In addition, farmers may need to demonstrate that they follow environmental regulations and adequately protect their workers. Farmers who have been fined for pollution and other violations of the law may forfeit the right to receive payments, as the government does not want to encourage unsafe or impractical farming activities.

The exact structure of a deficiency payment program can depend on policies established by regulators and legislators. Periodically, legislatures consider new farm bills, packages of legislation that cover various subjects related to agriculture. They can determine what kinds of financial assistance to offer to farmers, and how to administer these programs to make them efficient and function. Information is available for farmers and agricultural companies through the same government agencies that handle the program.