Facebook Twitter Gplus LinkedIn YouTube

Field of Schemes

The Taxpayer and Economic Welfare Costs of Shallow-Loss Farming Programs
Vincent H. Smith, Bruce A. Babcock and Barry K. Goodwin

Since 2007, American farmers have consistently enjoyed record crop prices, increasing yields, and record farm incomes. Nevertheless, they still want as many farm subsidies as they can get, ideally through programs that lock them into their current record income levels. Most—though not all—farm lobbies have recognized that the Direct Payments Program, a $5 billion-a-year welfare program in which payments mainly go to larger and wealthier farms, is no longer politically viable. Consequently, over the past two years, many farm groups have rushed to embrace the concept of shallow-loss programs.

Key Findings:

1) Shallow-loss programs are costly: Depending on structure and crop prices, these programs could cost the taxpayer as much as or more than the direct payments program they would replace, averaging as much as $8 to $14 billion a year over the next five years.

2) Shallow-loss programs amount to a new entitlement: Payments would be automatically triggered by revenue shortfalls and would be linked to average revenues over the past five years. So, when prices and yields increase, payment triggers will also increase, creating a new, partially disguised entitlement program that locks farmers into near-record incomes at the taxpayer’s expense.

3) Shallow-loss programs based on farm-level yields create incentives for the wasteful use of economic resources by buying down deductibles associated with federal crop insurance: Farmers would reap the benefits of record crop yields and prices. However, because a high percentage of revenues are guaranteed, farmers may adopt more risky farming techniques.

4) The Congressional Budget Office’s cost estimates for shallow-loss programs assume that recent historically high prices will be sustained: If corn, wheat, soybean, rice, and cotton prices return to the average levels observed between 1996 and 2011, however, program costs will balloon. A county-based program would cost taxpayers between $8.4 and $13.98 billion, depending on the rate of reimbursement. The Stabenow-Roberts shallow-loss proposal would likely cost taxpayers between $5 billion and $7 billion, depending on the mix of farm-based and county-based programs.

5) Shallow-loss programs will perpetuate the federal farm program tradition of giving the majority of subsidies to farms that do not need them in the first place: Shallow-loss subsidies, like direct payments and crop insurance subsidies, would be tied to the amount of land that households farm. Consequently, the largest and wealthiest farmers enjoy built-in buffers in the form of substantial equity in their farm operations (debt-to-asset ratios average less than 9 percent in the entire American agricultural sector). These individuals would receive the lion’s share of shallow-loss subsidy payments.

Get the paper ►