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Getting serious about reducing farm subsidies

Published on September 6, 2012, by in Farm Bill.

If there were ever a time when the government should and could get out of the business of subsidizing relatively wealthy tax farmers at the expense of less wealthy taxpayers, that time is now. The need for serious action to reduce the federal deficit makes the need to reduce farm subsidies urgent.

One way or another, taxpayers are spending about $20 billion a year, and about $100 billion over the five-year lifespan of a new farm bill, on programs that channel 80 percent of that money to less than 200,000 large and generally very wealthy farms, at a rate of roughly $400,000 per large farm over the five-year period.

Currently, 80 percent of all farm program subsidies are paid to the owners and operators of the largest 15 to 20 percent of farms. These larger farm households are much wealthier than the average taxpayer, typically with a net worth in the millions; have much larger incomes, averaging around $135,000 a year; and have very little debt, with the average farm’s debt-to-asset ratio less than 9 percent.

Essentially, most farm subsidies flow to rich farmers, almost all of whom run family farms and don’t need help from taxpayers to do well in their agricultural businesses.

In addition, for the past seven years, almost all U.S. farmers have enjoyed record or near record prices for their crops and livestock and record profits. Even in 2012, a year when drought-devastated corn and soybean production in the Midwest, USDA’s Economic Research Service is reporting that farmers will again have record or near-record net farm incomes because prices have soared for corn, wheat, other food and feed grains, soybeans and other oilseeds.

A fiscally prudent House and Senate would recommend substantial cuts in farm program spending of at least $10 billion a year and $100 billion over 10 years. There are plenty of wasteful programs that can be cut without damaging the agricultural sector.

Four fixes to the 2012 farm bill

First, the Direct Payments program could simply be ended. This is the $5 billion-a-year program that has been described by all the leading newspapers, including The Wall Street Journal and The New York Times, as welfare for farmers. Farm interests receive checks based on the commodities that were produced in the early to mid-1980s on the land they now own or farm. Federal deficit reduction savings would be $5 billion a year and $50 billion over 10 years.

Second, agricultural insurance subsidies could be cut substantially. Currently, farmers pay about 30 to 33 percent of the full cost of the federally subsidized crop insurance products they purchase. If they were asked to pay only half of the cost of those insurance policies, annual taxpayer costs would decline by an average of about $2 billion. In addition, agricultural insurance companies are heavily subsidized (to the tune of about $3 billion a year) to deliver federal crop insurance. The system is clearly inefficient: other countries deliver subsidized crop insurance policies much more cheaply (with costs that are more than 50 percent lower on a per-dollar-of-coverage basis). Reforming the delivery system could easily save another $1 billion per year.

Third, a wide range of soil, water and other conservation programs currently compete with one another for the same land while others are simply ineffective. The Conservation Stewardship Program (CSP) is a prime example in that respect: in the CSP, most farmers receive subsidies to use farming practices they have already adopted. Rationalizing and restructuring conservation programs could readily save taxpayers between $1 billion and $2 billion annually without doing harm to the environment.

Fourth, several price-related subsidy programs could be terminated, not replaced with other “bait and switch” programs that have the potential to be much more expensive than the programs they replace. Such programs include the long-standing loan rate or price support program from small grains, oilseeds, rice, peanuts and (more recently) pulse crops; the so-called Average Crop Revenue (ACRE) shallow loss program introduced in 2008; the Countercyclical Payments program introduced in 2002 and the dairy program. Savings would amount to about $1 billion a year.

Instead of focusing on the national budget crisis and recognizing that the farm sector is exceptionally healthy, the House and Senate agricultural committees have turned the 2012 farm bill process into a farm lobbyist’s dream and a taxpayer’s nightmare.

Instead of focusing on the national budget crisis and recognizing that the farm sector is exceptionally healthy, the House and Senate agricultural committees have turned the 2012 farm bill process into a farm lobbyist’s dream and a taxpayer’s nightmare. The committees believe that the direct payments program has to go because it is so politically toxic, but are assuming they can use about $3 billion of the resulting $5 billion in savings for new subsidy programs and have simply asked the farm lobbies for their ideas on what programs their farmers would prefer.

These programs, strongly supported by several commodity groups, include the Senate’s new shallow-loss program called Agricultural Risk Coverage (ACR), which would give subsidies to farmers when their farm’s per-acre revenue from a crop falls below 90 percent of its recent five-year average, with payments typically being made on all the acres planted for eligible crops. This subsidy program was scored by the Congressional Budget Office (CBO) at about $3 billion a year, but could average between $6 and $7 billion a year if crop prices returned to their recent 15-year average levels.

The House Agriculture Committee, responding especially to the concerns of peanut, rice and cotton growers, has proposed a Price-Loss Coverage (PLC) program that would provide many farmers with payments when market prices fall below very high reference prices. Payments under the PLC program, which is close to being a price-support program, would also typically be made on all acres planted for eligible crops. The CBO has scored the PLC program at about $2 billion, assuming commodity prices remain at or close to current record levels. However, if crop prices return to recent historical average levels, annual taxpayer subsidies under the PLC program would balloon to between $12 billion and $15 billion.

At the urging of special interests, the House committee’s 2012 farm bill also has provisions for a new dairy program that would impose penalties on dairy farmers running efficient, and growing, operations in order to protect inefficient dairy farms. House Speaker John Boehner has accurately described this proposal as a return to Soviet agriculture. The proposed dairy program is problematic from almost every angle one could imagine; it will create an inefficient dairy sector and increase processing costs for firms producing dairy foods, placing them at a real disadvantage with overseas competitors in both world export markets and the U.S. domestic market.

In addition, neither the House or the Senate has been willing to end the sugar program, which uses import restrictions and domestic marketing quotas to ensure domestic sugar prices do not fall below about 23 cents a pound, even though sugar prices have been more than 40 percent higher than the program’s target price for three years.

Fundamentally, left to their own devices, the Senate and House agricultural committees would apparently like to pursue a “business as usual” approach to the 2012 farm bill. Farm subsidies that generally flow to large and wealthy farmers would continue to remain high, and perhaps increase. Moreover, the new shallow-loss and price-support programs in the Senate and House bills would almost surely create significant problems for the U.S. with respect to international trade and access to export markets, because they clearly violate U.S. World Trade Organization commitments.

Notwithstanding some of the rhetoric from the chairs and ranking members, the nation’s fiscal crisis has not been reflected to any significant degree in either the Senate or House agricultural committees’ proposals. In addition, concerns about the overall economy and the welfare of taxpayers and consumers appear to have been very limited and have not displaced agricultural committee members’ traditional objectives of “bringing home the bacon” to their homegrown farm lobbies. At a time of genuine national concern about budget deficits, however, that approach to farm policy is simply not good enough. It is more than time to rethink and reform farm programs.