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5 questions free-market advocates must ask about the 2014 farm bill

Published on January 28, 2014, by

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Editor’s note: This piece was co-authored by Brad Wassink.

On Monday night, conferees from the House and Senate Agriculture Committees filed a farm bill that has been two years in the making. The bill is large and complicated, with many changes from prior legislation. Given the tight timeline from submission to vote, market-oriented policymakers would do well to answer the basic question: are the agricultural subsidy programs contained in this bill better those they replace?

Five core facets of this question—and their answers—should assist policymakers in making this determination as they digest the bill’s farm subsidy provisions:

1. Does it save taxpayer dollars relative to existing legislation?

No. Compared to the farm programs contained in the 2008 farm bill—passed under the leadership of Sen. Harry Reid and Rep. Nancy Pelosi—it is highly unlikely that the conference committee’s bill would yield any budget savings. New provisions contained in the legislation become more costly as crop prices fall—and crop prices have fallen substantially in the past year. As a result, the costs of new provisions would likely exceed any savings that result from elimination of the Direct Payments Program. Should crop prices fall to their historical average levels, the programs could cost taxpayers up to $15 billion more per year.

2. Does it save taxpayer dollars relative to the Senate’s proposed bill?

No. The conference report adds a potentially very expensive program—the Price-Loss Coverage program—that is not contained in the Senate Agriculture Committee’s proposal. As a result, the conference report’s package of farm subsidies will be more costly to taxpayers than the Senate’s bill.

See this infographic for a picture of how the conference report stacks up.

Farm_Bill_infographic_012814

3. Does it eliminate more subsidy programs than it creates?

No. Policymakers deserve credit for eliminating the wasteful Direct Payments Program, which cut farmers checks simply for being farmers, as well as two other subsidy programs (the ACRE shallow loss program and a price-triggered Countercyclical Payments Program). Seventy-five percent of those programs’ benefits flowed to the top 10% of wealthy farmers.

Yet instead of simply eliminating wasteful and ineffective programs, the conference report adds three new ones: the Agriculture Risk Coverage (ARC) program, the Price-Loss Coverage (PLC) program, and the Supplementary Coverage Option (SCO). The ARC and SCO programs would essentially guarantee that farmers’ revenues never fall below 86% of what they earned in previous years, when crop prices were at historical highs. The PLC program is simply an updated version of the Countercyclical Payments Program, but one which will be much more lucrative for farmers. The new program guarantees them much higher prices for covered crops.

No other business could hope for such guarantees, much less ones funded at taxpayer expense.

4. Is it consistent with the intent of the House Budget Resolution?

No. The House Budget Resolution established that $3.1 billion in annual budget savings should be achieved from the farm subsidy portion of the farm bill. The conference report falls far short of that goal, partially masking the shortfall with savings from nutrition programs. It is unlikely that the new bill will yield any savings—let alone $3.1 billion.

5. Will it prevent additional World Trade Organization (WTO) violations and sanctions?

No. As a result of WTO violations, United States taxpayers pay Brazilian cotton farmers $147 million per year in compensation for the anticompetitive effects of protectionist US cotton policies. Fresh sanctions for other programs would be costly and must be avoided.

While the new farm bill would remove price support programs for cotton, it would introduce a new heavily-subsidized insurance program that provides substantial subsidies tied to current production decisions.  Moreover, the conference bill’s proposed new ARC, PLC and SCO subsidy programs for other major crops like corn, soybeans, wheat, and rice—which are tied to current production and/or current prices—are blatantly non-compliant  with WTO rules concerning domestic subsidies for agricultural commodities. As a result, taxpayers, farmers, and other export-oriented sectors of the US economy will become more vulnerable to trade sanctions resulting from WTO disputes.

A path forward

Simple reforms to the conference report would save taxpayers billions, shield the United States from costly World Trade Organization sanctions, and ensure that fewer subsidies flow to the wealthiest farming operations.

  1. Simply eliminate the wasteful Direct Payments Program and the related shallow loss program called ACRE, whose benefits flow largely to wealthy farming operations. Don’t create three new costly and WTO-violating revenue protection programs to replace them.
  2. Cap crop insurance subsidies for the wealthiest farmers. A recent amendment from Sens. Coburn and Durbin would reduce by 15% crop insurance subsidies for farmers making over $750,000 annually, and would be a step in the right direction.
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Truth in advertising: Are there really any federal budget savings in a new Farm Bill?

Published on January 8, 2014, by

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Congressional leaders are seeking ways to offset the increases in spending that would occur were federal benefits for the long term unemployed to be extended for several months. Some have suggested those savings could come from reductions in farm subsidies embedded in a new farm bill. Yesterday, for example, Senator Grassley (R-IA), a long-time member of the Senate Agriculture Committee, was quoted as saying: “We aren’t having direct payments because you can’t justify them when farm prices have been so high—here prior to right now—and we did it to save five billion dollars a year. I think that unemployment needs to be offset, but it ought to be offset with cuts in spending someplace else.” The Direct Payments program, introduced in 1996, is the program that currently sends welfare checks to farmers each year on the basis of what their farms produced 30 years ago

Senator Grassley is correct in claiming that terminating the Direct Payments program would save about $5 billion a year in subsidy payments, as long as a related program called ACRE is also discontinued. What he doesn’t mention is that the new farm bill about to be released by the bipartisan Senate and House Conference Committee would introduce four new subsidy programs.

One is a new price support program called Price Loss Coverage (PLC) that ratchets up the prices that would trigger subsidy payments to close to recent record high prices for major crops. The second is a shallow loss revenue program called Agricultural Risk Coverage (ARC) designed to guarantee that farmers receive gross revenues that are close to their recent record levels over the next three to five years. The third is a special program for cotton, called STAX, that would do essentially the same thing for cotton that ARC does for other crops. And the fourth is a new, heavily subsidized shallow loss insurance program for all major crops called the Special Coverage Option (SCO).

Jointly these four new programs, plus a new dairy giveaway program, are very likely to cost the taxpayer considerably more than $5 billion a year, especially because prices for some major crops such as corn are now moderating relative to their recent historically high levels. On balance, the new programs become more costly when crop prices (and therefore farm revenues) fall. Taxpayers foot the bill.

For example, by itself, ARC could cost as much as $7 billion a year and PLC even more (in excess of $10 billion), if prices for major crops like corn and wheat moderate towards their long run trend levels, as they now appear to be doing (detailed estimates for the ARC and PLC program costs can be found here and here). The Food and Agricultural Policy Research Institute at the University of Missouri has fairly conservatively estimated the annual cost of the Special Coverage Option program at close to $1 billion a year, and the Congressional Budget Office has estimate the annual cost of the STAX program for cotton to be close to $0.4 billion. Combined, under realistic assumptions about future crop prices, these four new bait and switch programs are likely to cost taxpayers at least $6-8 billion per year. These new subsidy payments would more than offset the savings obtained from eliminating the Direct Payments program.

So, in practice, it is increasingly unlikely that the new farm bill (as it is currently being written) will provide any savings in federal spending to offset increased spending on unemployment benefits. Real savings would exist in the new farm bill if Congress simply ended the Direct Payments program and did not invent new subsidy programs that, for the most part, transfer taxpayer dollars to large farm operations, wealthy farmers and wealthy landowners.

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Farmers truly deserve a Happy Christmas, but probably not a give-away farm bill

Published on December 26, 2013, by

farm_decorated_for_christmasChristmas is a time for love, thoughtfulness, and caring: even for farm organizations that seem to want almost nothing more than to send taxpayer dollars to wealthy farmers in the largest amounts they can possibly finagle.

The truth about most farmers in the United States is that, like so many wonderful people in America, they are simply good folks working hard to make a living, sometimes in very difficult circumstances. I think of farmers who raise cattle and grow wheat along Route 2 in Montana. The road runs from east to west, thirty miles south of the Canadian border for hundreds of miles. At this time of year, courtesy of the real polar express, day time highs are often below zero (that’s zero Fahrenheit), lows sink well below minus twenty or thirty, and the winds blow hard. The roads are ice cold slick and even the cattle exceptionally unhappy. Yet farmers and ranchers do their best to make sure the animals are safe, fed, and properly watered, which is much harder than you might think when all the H2O around you is more suited for a Jack Daniels on the rocks than anything else.

We should celebrate and pray for what these wonderful people do every day of their lives. They do raise the crops we all need, and many are wonderful servants in their communities.

None of which, of course, means the federal government needs to give farm households with incomes much higher than those of the average taxpayer hundreds of thousands of dollars each year in the form of multiple subsidies. But we do need to say a genuine thank you, Happy Christmas, and have a wonderful new year (with great crops and no animal diseases) to each and every farmer and rancher.

While we are at it, we also need to be just as grateful for the hard working young lady, a single mother with two children working a “close to minimum wage” job at McDonald’s, who handed us our Egg McMuffins on Christmas Eve as we rush do our Christmas shopping.  Now that may be the sort of person who really needs our fiscal help, as well as our prayers and appreciation for the job they do so well.

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Lower corn prices may deliver many farm bill blessings

Published on November 22, 2013, by

Image Credit: Fishhawk (Flickr) (CC BY 2.0)
Economists are often viewed as poor forecasters, but sometimes we get lucky—especially when government policies that are fairly obviously unsustainable over the long haul have been distorting prices in commodity markets. Such is the case with the price of corn, which is now falling. That fact has important implications for the costs of the farm subsidy programs being considered by the House-Senate conference committee on a new farm bill.

In 2012, in examining the Senate’s preferred new subsidy boondoggle, a “shallow loss” program called Agricultural Risk Coverage, Professors Bruce Babcock, Barry Goodwin and I estimated the likely costs of that program to the taxpayer in two price scenarios.

First, as the Congressional Budget Office (CBO) has typically assumed in computing its recent cost estimates for new farm subsidy programs, we based our estimates of program costs on the assumption that prices for major commodities such as corn, soybeans and wheat would remain at recent record or near record levels.

For corn, we followed CBO and assumed that prices would average about $4.70 a bushel over the life of a new farm bill (propped up by “industrial demand” for corn as an input into ethanol production). We calculated that, on average, corn producers would receive about $2 billion a year if corn prices remained at about that level. Total taxpayer costs of the Senate ARC program for all the major commodities receiving subsidies would be about $3.8 billion under this high price scenario.

Next, we assumed that crop prices would move downwards towards their long run trend levels and re-estimated the costs of the Senate ARC program assuming an average corn price of about $2.80 a bushel. In that price world, we estimated that the ARC program would pay corn growers about $4 billion a year. By the way, under the current Direct Payments program that sends farmers welfare checks for doing nothing (which the ARC would replace with, according to the Senate Committee, the goal of lowering government subsidies to corn growers), USDA estimated that corn growers would receive about $1.97 billion from taxpayers in 2013.

This year, in US markets, the price of corn has steadily declined from its average of $6.89 a bushel in 2012 to about $4.20 cents, a level would be likely to trigger ARC payments for corn producers measurably in excess of the current subsidies they receive under the direct payments program. Why the decline in corn prices? Four main reasons: corn acreage has increased (so more corn has come onto the market), technology innovations have increased corn yields over the longer term (again more corn for sale), growing conditions have been relatively good this year (as opposed to drought poor last year), and the ethanol industry’s demand for corn is shrinking.

One reason for the decline in the ethanol industry’s demand for corn is the recent roll back of the EPA ethanol use mandate for 2014, also known as the Renewable Fuels Mandate, by three billion gallons. This rollback is closely linked to the decrease in US demand for gasoline by that has taken place over the past three or four years. The other reason is that oil prices have declined, making corn based ethanol less competitive with traditional gasoline and ethanol production less profitable.

What does the future hold for corn prices? Further rollbacks in the renewable fuels mandate appear quite likely, especially for corn based ethanol, which has also lost its appeal to environmental groups as a means of reducing greenhouse gasses. And corn yields are likely to continue to increase because of technical change (in the form of higher yielding varieties that have shorter growing periods and can even be planted successfully in places like Montana were corn would never have been viable fifteen years ago). What does that mean for corn prices? They are likely to continue to go down. And what does that mean for subsidies to corn growers under both the farm bills proposed by the Senate and House Agricultural Committees: they will go up.

Today the focus is on corn, but what about the prices for other commodities like wheat and soybeans whose growers are also big time recipients of Direct Payments subsidies? Wheat prices, over the long run, are relatively closely linked to corn prices, because low quality wheat competes with corn in the animal feed market. Shrinking corn prices are likely to lead to shrinking wheat prices over the medium to longer term, which fairly quickly would mean wheat producers would receive substantial ARC payments or, if the House Bill’s Price Loss Coverage price support program were to become law, substantial subsidy payments under that program.  Soybean meal is also an animal feed and so soybean prices are also somewhat related to corn prices, and are also likely to moderate.

How large could the total subsidy costs of the Senate and House new programs become? Much larger than the $5 billion in current annual taxpayer outlays under the Direct Payments: anywhere from as much as $7 billion to well over $10 billion a year, depending on which of the two programs built into the House and Senate bills were eventually included in a new Farm Bill.

The cold hard fact that corn prices are falling away from recent record levels appears to have had a salutary “wake up call” impact on the House and Senate Farm Bill conference committee proceedings. Yesterday, negotiations between House and Senate members came to a grinding halt, not least because the price of corn had fallen to $4.20 and the conferees and their staffs were faced with a genuine inconvenient truth. No legislator wants a new farm bill that will transparently spend more on farm subsidies than the current farm bill, especially given that overwhelmingly those subsidies flow to farm households that are much wealthier than the average taxpayer. And the corn market is letting the Farm Bill conferees and other members of Congress know that such is likely to be the case if they push forward with their preferred programs.

So, today, taxpayers and food consumers should all be grateful for the news about lower corn prices. Anything that gives the Senate and House Agricultural Committees a reality check about potentially wasteful farm subsidy programs should be applauded. That lower corn prices will eventually make eggs, meat, and breakfast cereals a little bit cheaper for all of us who eat food on a daily basis is just a very pleasant bonus.

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Who benefits from food aid? Not whom you might expect

Published on November 12, 2013, by
Feed My Starving Children (FMSC) (Flickr) CC

Feed My Starving Children (FMSC) (Flickr) CC

 

In Coleridge’s classic poem, The Rime of the Ancient Mariner, the Ancient Mariner, a grizzled and unpleasant old sea salt, forces an unfortunate wedding guest to stop and listen to his story.

He (the Ancient Mariner) holds him with his glittering eye—

The Wedding-Guest stood still,

And listens like a three years’ child:

The Mariner hath his will.

In much the same way, USA Maritime (a coalition that lobbies on behalf of shipping companies) appears to be playing the role of the grizzly ancient mariner, holding the House and Senate Agricultural Committees still with its glittering eye. Its story? Food aid must be purchased in the United States and shipped by US shipping companies under an American flag to maintain the effectiveness of the US food aid program. The coalition has vigorously opposed changes to the Food for Peace program that would reduce the amount of food aid cargo handled by US shippers.

US shippers have played a key role in facilitating the distribution of aid when local procurement was not possible. 40 years ago, markets in many developing regions were not sufficiently reliable to provide the food that was demanded.

That landscape has now changed. Local markets are far more reliable and sophisticated, and the costs of shipping US-grown food abroad now outweigh the costs of purchasing it locally. It is time that the Ancient Mariner added a new verse to his Rime: how he stepped away from his previous glories so that more of the world’s poor could be fed.

As work by Cornell Professor Christopher Barrett and others has unequivocally demonstrated, the requirement that food aid be domestically sourced results in 30% to 50% of non-emergency food aid being wasted on unnecessary packaging and transportation costs.

A much wiser, more effective, and more efficient use of taxpayers’ dollars would be to allow the funds to be allocated with complete flexibility by USAID in its subsidiary programs, including allowing most of the funds to be used for local sourcing. Local sourcing allows US food aid dollars to be used to procure food aid much closer to the region of need, rather than from the United States. The impacts on genuine US shipping companies would likely be considerably less than imagined.

For example, one major shipping company, the Maersk Line, with local headquarters in Norfolk, Virginia, is apparently a wholly owned subsidiary of the Maersk Group, a multinational corporation with its headquarters in Copenhagen, Denmark, where the company was founded. The Maersk Group owns and operates a wide collection of subsidiary companies in the global energy and shipping industries. For the Maersk Group, having a US shipping subsidiary is useful precisely because it can then compete for the business of shipping  food aid around the world at US taxpayers’ expense.

A particularly unfortunate approach to non-emergency food aid, embedded in farm bill food aid legislation since 1985 is the practice of monetization. Monetization of food aid is the practice of shipping US food (in bagged or processed form) to developing countries and allowing private non-profit aid organizations to sell the food in urban markets to obtain monies, which in turn are used to carry out development and aid programs in other areas.

One result is that the monetization program wastes at least 30% of the monies spent by taxpayers on non-emergency food aid. The other is that the non-profit organizations which benefit from the monetization program have joined forces with the shipping companies to become avid lobbyists for its continuation. Some non-profit organizations – for example CARE, OXFAM, and Bread for the World – have heavily criticized monetization as a waste of tax dollars and damaging to aid efforts. But others have become the program’s strongest advocates.

In the Senate and House Agricultural Committees, therefore, the monetization beat goes on. So perhaps the best thing that could happen is first for agricultural groups who represent the interests of farmers to recognize that their members are being disadvantaged by the program. They would be better off if more corn, wheat, soybeans and peanuts were being purchased by US food aid dollars in world markets, instead of those dollars flowing to shipping companies owned by Danish and other multinational corporations.

Second, monetization could be made much less attractive to the non-profits who currently benefit from the process by capping the revenue they obtain from selling food-aid food in third country markets at 50% of what is called the import price parity for a commodity. This is a “delivered to foreign market” price that includes shipping and handling costs which is estimated by the US Department of Agriculture Agricultural Marketing Service for different commodities purchased in the United States and shipped to overseas ports. Any income they earn above that amount could be returned to the taxpayer or allocated for other aid programs.

Aligning incentives for non-profit groups who deliver US aid to support a food aid program in which taxpayer funds are used more efficiently to help more impoverished people is always a good idea. Making monetization less attractive and, at the same time, shifting federal food aid resources to local sourcing and direct aid programs through which many of the non-profits have done great work in the past would be a great deal for the world’s poor, the US taxpayer, and the non-profits themselves.

Follow AEIdeas on Twitter at @AEIdeas.

 

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Scoring the farm bill policy options

Published on October 29, 2013, by

Farm_bill_infographicThere is an easy way forward on farm policy, and it is not contained in either the House or Senate versions of the Farm Bill that are about be considered by a conference committee. The answer is to extend current law, minus the indefensible direct payments program that almost everyone agrees needs to go.

Ranking the current farm subsidy proposals in the bills that have been approved by the Senate and the House helps shed light on what’s happening, and why extending current law—with simple, common-sense reforms—is the best and most realistic option. Rankings generally use a positive scale, say from one to ten, where ten is great and one is abysmal. But from an economic efficiency and equity (income redistribution) perspective, neither of the farm subsidy proposals passed by the House and the Senate deserves even a ranking of one. So let’s use a scale of minus 10 (diabolically irresponsible) to 0 (at least does no more harm than current law).

We should start with the truly feckless House Farm Bill, which genuinely earns its ranking of minus 10. Why does the House farm bill represent such a nadir in farm policy initiatives, and why is it worse even than current law and the Senate bill?

First, it would introduce an astonishingly wasteful and distortive new price support program, called price loss coverage (PLC). PLC would cost taxpayers billions of dollars each year if prices for crops such as corn, wheat and soybeans moderate towards their longer run historical levels, as is quite likely over the next five years. It also guarantees rice and peanut producers very large subsidies in most years, and will allocate most of the total subsidies to the largest 15% of farms whose owners on average earn over $140,000 per year and whose wealth is measured in multiple millions of dollars. All of this from a brand new program.

Second, the House bill includes a new heavily subsidized crop insurance program (called the supplemental coverage option) that is likely to cost taxpayers over $2 billion a year—about 20% of which will flow to crop insurance companies for almost no work and absolutely no risk (the CBO cost estimates for this program, which are much lower than this number, are widely viewed as gross underestimates). Once again a new program.

Third, the House bill places no limits on crop insurance subsidies to individual farms, which in the case of thousands of the largest and richest farms, exceed $100,000 a year and, in some cases, one million dollars a year. Regardless of their political persuasion, who believes that is a just and equitable use of tax payer funds? Probably no one: apart from the recipients, legislators from the constituencies in which they reside, and crop insurance companies and agents.

Fourth, the House bill fails to reform US international food aid by allowing genuine flexibility for local and regional sourcing of food aid to help desperately poor and disadvantaged people in places like Darfur, Ethiopia and Bangladesh suffering from man-made or natural disasters. Professor Christopher Barrett of Cornell University and others have estimated that requiring US sourcing and transport of food on US flag ships increases the costs of providing aid by 50%. More problematically, this also slows the delivery of such aid by many weeks and months. The result is a failure to deliver life and health saving aid to millions of the poorest people in the world.

Fifth, the bill includes a new subsidy program for dairy farmers that smacks of a Soviet approach to managing milk production through central planning by guaranteeing a minimum margin between milk prices and feed costs.

Finally, a score of minus 10 seems reasonable because the House bill could well increase total federal spending on farm subsidies by about $10 billion a year, even though it would terminate the $5 billion a year Direct Payments program – the policy under which farmers receive welfare checks for doing nothing. And most of that increase would go to the wealthiest farmers and landowners involved in agriculture.

So what about the Senate bill? Let’s give it a score of minus 5. It too introduces and continues truly poor policies. The Senate bill includes the new supplementary coverage insurance program, which also fails to limit crop insurance subsidies, fails to substantially reform international food aid policy, and contains a dairy margin guarantee program. So why does the Senate bill receive a somewhat less abysmal score? The reason is that the Senate’s new subsidy give-away program, called the Ag Risk Coverage program, gives away a little less than the House’s Price Loss Coverage program by loosely tying levels of farm income protection and subsidies to recent trends in crop prices instead of locking in subsidies to current record crop price levels.

Why give the Senate bill a score of minus 5? Because, after accounting for savings from terminating the Direct Payments program, and under plausible circumstances, the Senate Bill could well increase total spending on farm subsidies by about $5 billion a year relative to current law. Again, these funds would for the most part flow to the richest farmers and landowners.

What about the farm subsidies built into current law (the 2008 Farm Bill)? Well, current law gets a score of zero: it contains wasteful, unfair, production distorting, WTO violating policies that make no sense, but it is less costly and less distortive in terms of economic efficiency and fairness than either the House or Senate Bills.

Is there an alternative that would get a positive score? The answer is yes. Current law minus the “let’s give welfare checks mainly to rich farmers and landowners for doing nothing” Direct Payments Program and minus a potentially expensive and production and trade distorting program called ACRE, introduced in 2008. That would save the taxpayer $5 billion a year; so we could give that alternative a score of plus 5. It would be a simple, fair, and easy-to-implement Farm Bill. The reforms would be far from perfect, but would move in the right efficiency and equity direction from current policy. More cuts in subsidies would be better, especially in relation to the federal crop insurance program, but a step towards a less distortive and more equitable Farm Bill would genuinely be a refreshing and historic policy initiative.

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US farm policy amounts to $80 billion for rich people

Published on October 16, 2013, by

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Editor’s note: This article originally appeared in Real Clear Markets on October 16, 2013.

Alice doesn’t just live in Wonderland anymore; she seems to be everywhere. On ABC, in numerous op ed columns (along with the entire Corleone family in one case), and even hiding out in multiple DC monuments. She has also, apparently, invaded many Congressional offices. Why? Because the chaos of Wonderland ‒ complete with various lunatic Queens of Hearts, Mad Hatters, Sleepy Dormice, and random Cheshire Cats on Cruz control ‒ seems to have become pervasive in Washington’s corridors of power over the past three weeks (you can pick your own cast for Charles Dodgson’s characters; there are many, many contenders for the leading roles).

But, in fact, the advent of Wonderland into the world of Congressional legislation is not a new phenomenon. And the House and Senate Agricultural Committees are prime examples of the long standing nature of the Wonderland legislative tradition.

You might think that no sensible policy maker would have handed out about $80 billion dollars in welfare checks mainly to very wealthy farm households at the rate of about $5 billion a year for doing nothing since the mid-1990s, but you would be wrong. The House and Senate Agricultural Committees have been more than happy to do exactly that through the Direct Payments program.

Then there is the fiscal fiasco called the federal crop insurance program. When you and I buy home owners or auto insurance, or small and large businesses purchase property and casualty insurance, we pay premiums that cover the full commercial costs to the private insurance companies that design, deliver, and service those insurance contracts. That is not the world of federally subsidized crop insurance. In that Wonderland world, taxpayers cover 70 percent of the insurance premium costs (all of the administrative costs and an average of about 62% of expected losses). Not quite the way a free enterprise market based system would envisage how a service should be offered or paid for.

Most farms are successful moderate-sized businesses (annual failure rates in agriculture run at about one of every 200 farms). Many of them would have to pay about $30,000 a year in premiums to cover crop losses on their operations if they had to pay the full costs of their policies. Instead, those farms get to pay $9,000 premiums and on average receive about $23,000 a year in indemnities. What a great deal, and wouldn’t many moderate sized main street and manufacturing businesses like to have the same deal for the property/casualty insurance they buy. But those businesses are not in the Senate and House Agricultural Committees’ versions of Lewis Carroll’s Wonderland.

Recently, National Crop Insurance Services, a major lobbying group for the crop insurance companies that deliver the federally subsidized program (in return for two to three billion dollars of tax payer funds in most years), also happily contributed to the Wonderland world of farm policy debates. They claimed that farmers paid large amounts for their insurance coverage each year, over $4 billion in 2012 and 2013, and, therefore, the program requires tough sledding on the farmers’ part.

How true with respect to the $4 billion, but what a wonderfully distorted Wonderland view of the world! Because, of course, in 2012, those same farmers also received a total of more than $16 billion in payments for crop losses (merely about $12 billion more than they paid into the program).

In a good year for crops, but a bad year for indemnity payments, the worst farmers are likely to do is pay $4 billion dollars or so in premiums and get back only about $7 or $8 billion dollars in indemnity payments (a mere transfer of $3 or $4 billion). An agricultural Mad Hatter might well say “How unreasonable, give those mainly very wealthy farmers more.”

And that is what the House and Senate Agricultural Committees want to do in the newest Wonderland crop insurance proposal they have included in the recent House and Senate agricultural bills, the Supplementary Coverage Option (SCO). It is not enough that farmers can buy heavily subsidized crop insurance policies that trigger payments when their revenues or yields from a crop fall below 85 percent or 75 percent of expected levels. Now both the House and Senate Agricultural Committees wants to give them even more protection, mainly at the expense of taxpayers, when in the county in which their farms are located average revenues or yields fall below 90 percent of their expected levels.

There are many other wonderland farm subsidy policies; for example, the U.S. sugar program (which costs consumers over $3 billion a year) and the ethanol mandate (which has more than doubled the price of corn but done little or nothing for the environment). And a recent claim by a senior Senate Agricultural Committee member that reducing crop insurance subsidies for millionaire farmers by 15% would undermine the fiscal integrity of the program comes straight out of the Lewis Carroll nonsense poem playbook. So, when it comes to farm policy, Alice and her Wonderland associates have been alive and kicking for many a long year. If only they would all go to sleep for a while and give the taxpayer a break!

 

Vincent Smith is a visiting scholar at the American Enterprise Institute (AEI), and a professor of economics in the Department of Agricultural Economics at Montana State University. 

 

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A symbolic vote on crop insurance reform

Published on October 11, 2013, by
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Tractor by Shutterstock.com

Editor’s note: This post originally appeared on the AEIdeas blog on October 11, 2013.

Update: H.R. 2642 failed the House vote 195/204.

The House is likely to vote on its rule for going to conference on the farm and nutrition bills tomorrow. A key point of debate will be the House conferees’ stance on a crop insurance reform amendment put forward by Sens. Coburn and Durbin. House leadership may issue a nonbinding motion to instruct (MTI) the conferees to vote for or against the provision, and that MTI is currently up for debate.

The Coburn-Durbin provision would reduce the level of federal crop insurance premium subsidy support by 15 percent for farmers with adjusted gross incomes (AGI) in excess of $750,000.

The provision acknowledges a key reality: the federal government pays too much to subsidize crop insurance for farmers. A March 2013 GAO report pointed out that the federal government pays an average of 62 percent of farmers’ crop insurance premiums, and paid out over $16 billion to cover farmers’ premiums and losses in 2012.

What’s worse? The largest crop insurance payouts are giveaways to America’s largest and most profitable commercial farming operations. In 2011, 5 percent of these operations garnered over a third of the total premium subsidies. The following chart shows how benefits are distributed: the bottom 50 percent of recipients-many of them what we would think of as “family farmers”-receive next to nothing. In contrast, the top 10 percent of recipients received $4 billion. Something is wrong here.

Graph

The Coburn-Durbin provision takes a step in the right direction by curbing payouts to the wealthiest segment of premium subsidy recipients. It is a symbolic recognition of the fact that agriculture policy-and particularly the crop insurance program-is highly inequitable and very expensive. In a time of tight budgets, billions in payouts to a sector that is projected to bring in a historical record of $120.6 billion in net farm income this year are simply not warranted.

In fact, the Coburn-Durbin provision could go much further. By setting an AGI at three-quarters of a million dollars, the amendment is likely to impact only the wealthiest 1 percent of farming operations. And it won’t affect them very much-a 15 percent reduction in premium subsidies is quite modest. Plus, the government will still be on the hook for most of the insurance indemnities incurred by those large operations. For example, the twenty plus farm operations currently receiving annual premium subsidies in excess of one million dollars would be reduced to receiving only between $850,000 and $1.35 million in subsidies instead of between $1 million and $1.5 million.

Much more work remains to be done if the federal crop insurance program is to turn away from its current practice of subsidizing multimillion dollar businesses that can unequivocally manage their own risk. An across-the-board cut in premium subsidy rates would be one productive way to go. Setting meaningful premium subsidy caps-as the Kind-Petri amendment would do-would be another.

That amendment is a stronger reform, but Rep. Ryan’s motion on Coburn-Durbin will make it crystal clear who is opposed to reform of any kind. The Coburn-Durbin amendment sends an important message: it is time to begin rolling back a policy that has become synonymous with agribusiness welfare.

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The House and Senate farm bills don’t make the grade

Published on September 25, 2013, by

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Editor’s note: This article originally appeared in The Hill on September 25, 2013.

The House of Representatives last week passed a nutrition-only bill that ignited controversy by axing $4 billion per year from the Supplemental Nutrition Assistance Program’s (SNAP) expected annual budget of $76 billion. Many Republicans view SNAP as low-hanging budget-cutting fruit; many Democrats view it as an essential benefit to America’s neediest families.

If Congress is serious about moderating spending with minimal harm, it should focus elsewhere: on the farm subsidy programs the House and the Senate have already passed.  Billions more in savings could be obtained from cutting farm program subsidies than from the proposed cuts to SNAP. But pressured by the ag lobby, legislatures are giving with one hand and taking with the other. Behind the haze of the rancorous political fight over food stamps, both bills quietly expand welfare for wealthy farmers and insurance companies.

Ranking the current farm subsidy proposals that have passed the Senate and the House helps shed light on what’s happening.  Such rankings generally use a positive scale, where ten is great and one is abysmal.  But from an economic efficiency and equity (income redistribution) perspective, neither proposal deserves even a ranking of one.  So let’s use a scale of minus 10 (diabolically irresponsible) to 0 (at least does no more harm than current law).

We should start with the truly feckless House farm bill, which genuinely earns its ranking of minus 10.  Why is that bill worse even than current law and the Senate bill?

First, it would introduce a wasteful and distortive price support program, called price loss coverage (PLC). PLC would cost taxpayers billions of dollars each year if prices for crops such as corn, wheat and soybeans moderate towards their longer run historical levels, as is quite likely over the next five years.  It also guarantees rice and peanut producers very large subsidies in most years, and will allocate most of the total subsidies to the largest 15 percent of farms whose owners on average earn over $140,000 per year and whose wealth is measured in multiple millions of dollars.  All of this from a brand new program.

Second, the House bill includes a new heavily subsidized crop insurance program (called the supplemental coverage option) that is likely to cost taxpayers over $2 billion a year—about twenty percent of which will flow to crop insurance companies for almost no work and absolutely no risk. Once again, a new program.

Third, the House bill places no limits on crop insurance subsidies to individual farms, which in the case of thousands of the largest and richest farms, exceed $100,000 a year and, in some cases, one million dollars a year.  No one believes that is a just and equitable use of taxpayer funds, except perhaps the recipients, their legislators, and crop insurance companies and agents.

Fourth, the House bill fails to reform U.S. international food aid by allowing genuine flexibility for local and regional sourcing of food aid to help desperately poor people in places like Darfur, Ethiopia and Bangladesh suffering from man-made or natural disasters.  Professor Christopher Barrett of Cornell University and others have estimated that requiring U.S. sourcing and transport of food on U.S. flag ships increases the costs of providing aid by 50 percent. This practice also slows the delivery of aid by weeks and months with catastrophic consequences for millions of the world’s poorest people.

Fifth, the bill includes a new subsidy program for dairy farmers that smacks of a Soviet approach to managing milk production through central planning by guaranteeing a minimum margin between milk prices and feed costs.

Finally, the House bill could well increase total federal spending on farm subsidies by about $10 billion a year, even after terminating the $5 billion a year Direct Payments program–policy under which farmers receive welfare checks for doing nothing.  Most of the increase would go to the wealthiest farmers and landowners involved in agriculture.

The Senate bill earns a score of minus 5.  It too introduces and continues truly poor policies, including the new supplementary coverage insurance program. That bill also fails to limit crop insurance subsidies or substantially reform international food aid policy, and contains a dairy margin guarantee program.  The Senate’s bill is not quite so bad because its new subsidy give-away program, the Agriculture Risk Coverage program, gives away a little less than the House’s Price Loss Coverage program. After accounting for savings from terminating the Direct Payments program, the Senate Bill could well increase total spending on farm subsidies by about $5 billion a year relative to current law—funds which would largely flow to the richest farmers and landowners.

There an alternative that would get a positive score. Current law, minus the “welfare checks mainly to rich farmers and landowners” Direct Payments program and minus a potentially expensive production and trade distorting program called ACRE, would save the taxpayer $5 billion a year and earn a score of plus 5.

These reforms would be simple, fair, and easy-to-implement.  Though far from perfect, the resulting Farm Bill would be a move in the right efficiency and equity direction.  More cuts in subsidies—especially to the federal crop insurance program—would be better, but a step towards a less distortive and more equitable farm bill would be a genuinely refreshing and historic policy initiative.

Smith is a visiting scholar at the American Enterprise Institute (AEI), a professor of economics in the department of agriculture at Montana State University, and co-director of MSU’s Agriculturual Marketing Policy Center.

 

 

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‘Only 2 cents per meal’: Why we should be grateful for crop insurance (or perhaps not).

Published on July 25, 2013, by
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Yesterday, a crop insurance industry funded group called National Crop Insurance Services, whose motto is “Crop Insurance: Keeps America Growing,” proudly announced that the federal crop insurance program only costs you and me 2 cents every time we sit down at the table to eat a meal. The implication: we should be grateful that such a wonderful program which, according to many farmers and insurers, prevents the collapse of food production in the United States, costs all of us so little.

Of course, that notion is pure nonsense. The United States is richly endowed with highly productive farmland, well-educated farmers and ranchers, and an industry enjoying record- and near-record-high prices for crops and livestock. Take away the annual average crop insurance program subsidies and farm incomes would fall from their current record levels of nearly $400 billion a year by no more than 1.5%. Agriculture would remain one of the most profitable sectors of the US economy, with an average debt-to-asset ratio of about 10% and average and median farm household incomes well above the national average for all other people.

Let’s remember what the federal crop insurance program really does. It kicks about $7 billion a year to farmers and $2 to $3 billion a year to crop insurance (much of which in the end goes to domestic companies like Wells Fargo and international reinsurance companies like Swiss Re). Farmers pay no more than 30% of the full cost for their federally subsidized crop and livestock insurance policies; the taxpayer picks up the other 70% through premium subsidies to farmers and additional direct subsidies to insurance companies to cover their administrative costs.

The entire federal crop insurance program encourages farmers to adopt high risk production strategies that waste economic resources because the taxpayer bears most, if not all, of the risks associated with those strategies. And, of course, the primary beneficiaries of the program are the crop insurance companies and crop insurance agents, because their industry would almost surely not exist without massive taxpayer subsidies. And over 80% of the farm subsidies go to the largest and wealthiest 15% of farm operations. Literally thousands of farmers receive over $100,000 a year in premium subsidies through the federal crop insurance program.

Finally, using the National Crop Insurance Service’s own claim that the federal crop insurance program only costs each of us 2 cents per meal, let’s see what the real annual cost of the program is for a family of four that can afford three square meals a day. Two cents per person implies eight cents per trip to the dining table and, given three trips per day, 24 cents per day for that family. Given that there are 364 days in the year (let’s ignore those pesky leap years), that means every family of four is only handing over $87.36 every year to farmers and the crop insurance industry for a program that effectively does nothing for the quality, quantity, or even the price of the meals they need. Of course, if you are a single mom or dad and only feeding a family of three, then the annual cost falls to a mere $65.52, nothing you would really care about when you are living on a poverty-line income, given that you know that almost all that money is going to support wealthy and very wealthy farmers, insurance agents, insurance companies, and multinational reinsurance companies.

This article originally appeared on the AEIdeas blog.