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Farmers with Benefits

The perpetual subsidy machine.

Apr 29, 2013, Vol. 18, No. 31 • By ELI LEHRER
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American farmers did well in 2012, to say the least. They benefited from record-high commodity prices, burgeoning organic produce markets, and high sale prices for farmland. As they have for two decades, farm families took home more annual income—about $20,000 more on average—than non-farm families. And they could count on many friends in Congress: While facing a “fiscal cliff,” the uncertain sustainability of entitlement programs, and the near certainty of tax increases, members of both parties came together around bills that would have spent at least $950 billion on agricultural subsidies over the next 10 years—an increase of more than $300 billion from the most recent (2008) farm bill. 

Farm

And you should see us milk the system

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While gridlock and the press of other issues resulted in Congress deciding to kick the can until September of this year, the fundamental contours of the debate remain the same: Most conversation in Congress revolves around how much federal largess to farmers should grow, and hardly anybody questions whether or not the subsidies ought to continue.

The coming debate over a major farm bill, and the programs intended to benefit farmers in particular, matters not just for the financial stakes—although they’re significant. It’s also a test of the Republican party’s mettle when it comes to dealing with the size, scope, and negative consequences of federal activity. If the GOP and, for that matter, Democrats honestly concerned about good governance cannot hold the line against ever-growing subsidies to farmers in the bill, they cannot claim much credibility to reform other parts of the federal edifice. Quite simply, the current farm bill, now approaching its first round of major committee discussions, ought to be a crucible for anybody concerned about the country’s finances.

That said, support for farm programs runs deep. For roughly five decades, farm subsidy programs have expanded as a result of a deeply corrupt log-rolling agreement that folds subsidies to farmers into a massive bill with food and nutrition programs for the poor. As a result, urban, mostly Democratic members of Congress have supported significant subsidies for farmers in return for rural, generally Republican members’ support of programs like the Supplemental Nutrition Assistance Program (SNAP), better known by its former name of food stamps.

As an exercise in client politics, there’s no doubt this bargain has “worked”: Not only do both types of programs garner votes for their supporters, but SNAP and more than a dozen other federal nutrition programs create a larger market for the products that farmers grow. In raw dollar terms, it’s pretty clear that the nutrition programs and their liberal supporters get the better deal: The current farm bills devote more than 75 cents of every dollar in the bill to them. (Of course, the nutrition programs also have far more direct beneficiaries.)

Nutrition programs are costly, prone to fraud, and in need of serious management improvements. That said, there’s little doubt that their fundamental purpose of feeding people, particularly children, who would otherwise go hungry has widespread support. While there’s plenty of merit in reforming them in ways that save money—the House Republican-passed budget which block-grants the program to states offers one potential model—getting rid of them altogether appears impossible and arguably inhumane.

The direct farm support programs can’t claim anything like such a public purpose. Although they’re significantly smaller, somewhere around $300 billion over the 10-year period of the farm bill, farmer support programs have outlived their usefulness. The dairy price supports program (governed under a 1949 law based on policies first adopted in the 1920s) serves as a case in point. In the early 20th century, the program may have had a purpose: Practical refrigerated trucks didn’t exist, and as a result, milk couldn’t be sold more than about 70 miles from the dairy that produced it. Policymakers had reason to think that cities might have a hard time sustaining supplies of fresh milk. Thus, they dreamed up a Rube Goldberg series of equations to assure a commercially viable price for milk in every market—variables have included things like a city’s distance from the dairy center Eau Claire, Wisconsin. 

A few refrigerated trucks were already on the market by 1949, however, and, just a few years after the bill passed, technological problems with transporting milk long distances had been solved. But the system remains in place and makes all dairy products more expensive. Other programs send U.S. tax money to Brazil in a blatant payoff to prevent the South American giant from bringing World Trade Organization complaints against the United States for our own even larger sugar subsidy and import restriction program.

But the dairy and sugar programs are only one small corner of the universe of absurdity that characterizes the nation’s farm payments system. Take, for example, the second-largest agricultural subsidy program overall, something called “Direct Payments.” Originally passed in 1996 in what now can be counted as one of the last true small-government achievements of the reformist Republicans who led the class of 1994 in the House, the program was intended to wean most farmers off of subsidies. At the time it passed, Congress promised that the payments would decline each year and vanish entirely by 2002. Because of its status as a transitional program, however, it had fewer requirements than any program before or since: Subsidies flowed based on historical growing patterns, and farmers didn’t have to plant anything to receive federal money, and it continues to the present day. Although its downright absurdity has led to a broad consensus to eliminate it—even most farm groups say they are happy to see it end—that doesn’t stop farmers from trying to get their hands in the public till in other ways.

Right now, the biggest subsidy, scheduled to cost about $90 billion over the next 10 years, flows to a federal crop insurance program. The program requires private insurers to service policies and take on some risk, but federal agencies set the prices, pay a large share of the premiums on farmers’ behalf, and “backstop” the private insurers when losses exceed certain thresholds. Unlike most other insurance, crop insurance protects not only against accidental losses, which would be unexceptional, but also against fluctuations in commodity prices. This, despite the fact that there is a robust private solution to the risk posed to farmers by such fluctuations, namely the trading of futures contracts for agricultural commodities.

Indeed, most of the payments made under the program come from these protections against price fluctuations. Farm groups and bipartisan majorities of every committee that has voted on farm policy in the last two years have supported a cynically designed replacement for direct payments called “shallow loss,” which won’t charge any premiums and isn’t included in the insurance sections of the bill. Unlike the current crop insurance programs—which typically leave farmers themselves or entirely private insurers responsible for roughly 40 percent of a loss—it will cover as much as 90 percent of all losses. Since the proposed formulas will pay farmers for “losses” based on declines from current, historically high prices, this amounts to a virtual profit guarantee for those who grow food and fiber.

Even worse, these programs promise to do real damage to the environment. Since the Reagan administration, just about everybody receiving subsidies has had to follow a few simple rules. In particular, those who plant highly erodible land with federal subsidies need to develop plans to avoid soil erosion, and such subsidies can’t be used to drain wetlands that serve as wildlife habitat, storm buffers, and natural water filtration. (Farmers can still do these things with their own money, but taxpayers won’t pay for it or provide them with disaster relief.) As a result of the end of direct payments and subsequent expansion of crop insurance subsidies, however, there’s a real chance that these accountability mechanisms might be lessened or even eliminated. 

The result could be real environmental damage: major loss of wetlands and outright destruction of good farmland as a direct result of government policies—damage that would never happen under a free market system. Because of the subsidies and profit guarantees, farmers will have every reason to plant marginal land that would be far better left in something close to its natural state. Indeed, to date, much of the best and most thoughtful opposition to agricultural subsidies has come from decidedly green groups like the National Wildlife Federation, the Environmental Working Group, and Friends of the Earth. These groups are hardly hotbeds of free market ideology, but they have just as much dislike for agricultural subsidies as any group on the right.

Whatever function they once served, America’s producer-side farm subsidies no longer have any valid public purpose. The much-romanticized family farm is, for all intents and purposes, dead: The number of farms producing enough income to support a family (more than $100,000 in gross revenues) has declined every year since World War II. As of 2012, only about 400,000 commercially viable farms—less than three-tenths of 1 percent of all households—exist in the United States. The great bulk of subsidies flow—directly or indirectly—to wealthy people and agribusiness. The Environmental Working Group found that 26 businesses got over $1 million each in crop insurance premium subsidies during 2011 alone. Furthermore, many of the most promising sectors of the agricultural economy—boutique organic farms and wineries—are also those that receive the least support from the government.

Eliminating all farmer-side subsidies immediately may not be a realistic course of action. As the 1996 effort to phase them out has shown, even an agreement to do so may fall by the wayside. But America’s agricultural subsidies and price controls have well outlived any usefulness they may once have had. If they want to show they are serious about fiscal responsibilities, conservatives and liberals in Congress should get together and work to minimize the pointless largess that taxpayers now distribute to the nation’s farmers. 

Eli Lehrer is president of R Street.

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