Farmers in the United States benefit from hundreds of government programs. In 2015 alone, they will receive about $18 billion in the form of direct taxpayer-funded subsidies. These so-called "farm income safety net" payments flow to farmers through federal crop price support, dairy income support and livestock insurance programs.
As if that wasn't enough, other benefits come in the form of hidden subsidies that raise prices for household products such as sugar. By including restrictions on the imports of some commodities, these market-distorting programs raise crop prices and damage the competitiveness of the U.S. food processing industry.
Farmers are also encouraged to adopt conservation practices through substantial subsidies from the U.S. taxpayer. While the stated goal of these programs is to reduce environmental pollution and limit the loss of the nation's soil resources and wild life habitats, an important second goal for many of these programs is to pay farmers to take land out of production and raise crop prices by reducing crop supplies.
Most industries are required to clean up or prevent their pollution and other environmental messes at their own cost; in several ways, however, the farm sector is allowed to mess up and then clean up (or be paid not to mess up in the first place), all at the taxpayer's expense.
Is there a real need for the "farm income safety net" subsidies farmers are getting? Here are some important facts.
For several decades, as a group, farmers have enjoyed substantially higher incomes and substantially more wealth than the average American. The largest producers, the top 15 percent of all farmers, receive about 85 percent of all farm subsidy payments. They are much richer than other farmers and enjoy incomes in the hundreds of thousands of dollars. Over the past five years, farmers have enjoyed record, or near-record, crop prices and profits. Not surprisingly, farms fail financially at a fraction of the rate of businesses in every other major sector of the economy.
Yet the 2014 farm bill contains a range of new farm subsidy programs that are likely to cost billions of dollars more than the ones they have replaced. The new programs will continue to send most of the subsidies to the largest and most successful farms that are least in need of government help. The subsidies are also more likely to create problems for the United States in trade negotiations.
In an environment where federal funds are scarce, how did this happen? How did a set of economically inefficient programs that disproportionately serve the well-off make their way into law just after a severe recession? Understanding this question — as well as what better policy might look like — is critical to advancing reforms that make sense for every family in America, not just farmers.
Farm bill subsidy spending
Total federal farm bill spending is likely to average more than $18 billion a year between 2015-18.
This is several billion dollars a year more than the estimates provided by the Congressional Budget Office (CBO) in January 2014, just before the passage of the 2014 farm bill. The reason: Farm price and income support subsidies will be larger because crop prices paid to farmers are likely to be much lower than the CBO assumed when it made its subsidy cost estimates.
The spending breakdown for the three program areas is as follows: On average, annual subsidies for price and income support programs will likely cost taxpayers between $5 billion and $7 billion, but could well exceed $12 billion or even $15 billion in some years. Conservation program subsidies will cost another $5.5 billion a year. Crop insurance program subsidies are likely to exceed $8 billion a year, of which about $2 billion will be paid to private crop insurance companies just for program delivery.
Some farm programs had to go
The 2014 farm bill axed several long-standing price and income support subsidy programs and rationalized a wide range of conservation programs.
The Direct Payments program under which farmers received about $5 billion a year in welfare checks was terminated. Farmers received those payments for no reason other than the land they currently farm was used to produce corn, cotton, rice, soybeans, wheat, barley and a few other crops in the 1980s and 1990s. The bigger and richer the farm, the bigger the welfare check.
It was clearly a terrible design for a government-funded welfare program billed as a helping hand for family farmers. By 2010, the Direct Payment program had become so politically toxic that even the House and Senate agricultural committees, along with some major farm interest groups, agreed to let it go.
The 2014 legislation also ended subsidy programs that triggered payments to farmers when crop and milk prices were relatively low.
In reality, these crop price and income-related programs were abandoned mainly because farm organizations viewed them as incapable of delivering substantial financial benefits to their members. Some farm group leaders even complained the programs weren't working because crop prices were too high to trigger subsidy payments.
Many of the farm lobbies view these farm programs as entitlements that should deliver extra payments to farmers all the time, even when crop prices and farm incomes are at record levels. These programs were abandoned because they were not sufficiently lucrative.
The farm lobby strategy
If these had been the only changes in the 2014 farm bill, the legislation would have been more sensible. Unfortunately, they were not. Between 2010 and 2012, agricultural organizations like the National Corn Growers Association, the Cotton Council, the Farm Bureau, the National Farmers Union and milk and rice producer interest groups invested substantial resources in developing a wide range of new farm subsidy initiatives to replace the politically toxic Direct Payments program.
Ideally, these groups argued, the new programs should be politically attractive by providing farmers with taxpayer-funded income supports only when they appeared to need help. Those programs would then be marketed to Congress as providing a critically-needed farm income safety net. Never mind that between 2007-13 farm household incomes were at near record levels and substantially higher than the average incomes of all other U.S. households.
An important subtext for the farm lobbies was that the new programs should also be designed to enable farmers to recoup most, if not more of the $5 billion in annual subsidies farmers had received through the soon-to-be-defunct Direct Payments program. The aim was to create a "reformed" program that would lock them into the record incomes and crop prices farmers had enjoyed between 2006-13.
The lobbies recognized that the current prices were well above recent historical levels and were likely to fall in the near future. They also realized that protecting farmers against falling prices was an easier narrative to sell than the Direct Payments model. The farm lobbies also believed that under their new proposals, the total dollars transferred to the agricultural sector could be just as large.
For the most part, the House and Senate agricultural committee leadership worked assiduously to give the farm lobbies exactly what they sought. A few committee members even had direct interests in farms, and they, or members of their families, were beneficiaries of a farm subsidy program.
Is agriculture risky business?
The farm lobby narrative presented to Congress and the general public was that while the Direct Payments program was clearly unjustified, and other older programs had outlived their usefulness, farmers still needed a substantial government-funded farm income safety net because they face uniquely severe production risks and extremely volatile prices.
In that context, the farm lobbies argued that the heavily subsidized federal crop insurance program should not be touched. Taxpayers cover about 70 percent of the full costs of all crop insurance policies, a policy which provides many of the wealthiest farmers with hundreds of thousands of dollars in annual subsidy payments. However, the crop insurance program was and remains the lobbies' sacred cow.
The story, strongly endorsed by the House agricultural committee leadership and, perhaps to a lesser extent, by the Senate agricultural committee, continued as follows: The federal crop insurance program, while "critically needed" to guarantee the future of the food supply, did not provide sufficient protections against price and yield risks to major crops.
Subsidized crop insurance indemnity payments for crop yield or revenue losses only kick in when those yields or revenues fall below 70 or 80 percent of their expected levels. The farm lobbies and the House and Senate agricultural committee leadership decided, however, that additional subsidies were "needed" because farmers would be financially vulnerable to "shallow losses" when their revenues from market sales declined by as little as 10 or 20 percent from their expected levels.
It's a surprising point of view, since farmers also frequently receive revenues well above their expected levels. Competent, well-educated business people — and most farmers today are just that — know that farm incomes will vary from one year to the next. Like the managers and owners of most other businesses, they are perfectly capable of managing their farm finances to cope with that sort of income variability without any help from the federal government.
Is farming in fact an exceptionally risky business?
The claim that the farm sector in the United States faces substantially more severe price risks and financial risks than other sectors of the economy — and therefore needs and deserves special protections from the government — is highly suspect. Farm debt-to-asset ratios currently average 10 percent, and over the last 10 years that average has never exceeded 15 percent. Moreover, over the last 15 years, farms have failed financially at an astonishingly low annual rate of substantially less than 1 percent.
On an economy-wide basis, non-farm businesses are much more highly leveraged than farm businesses, and about one in seven non-farm businesses fail annually. Though, by and large, society does not feel obligated to provide taxpayer-funded financial assistance to these businesses.
So why treat the farm sector differently? For over 50 years, the agricultural sector has been a far less financially risky place to operate than Main Street or Silicon Valley. It is only one percent of the economy, and the "farming is an exceptionally risky business" narrative, while not based on facts, is simply used to provide a justification for access to the taxpayer's pocketbook.
The current subsidy landscape
So what does the current farm subsidy landscape look like? In place of the Direct Payments programs, the farmers who received those subsidies — producers of corn, peanuts, rice, soybeans, wheat, grain sorghum, oilseed crops, chickpeas and lentils — were given access to two major new subsidy programs. One, a new price support program called Price Loss Coverage (PLC), is designed to be exceptionally beneficial to peanut and rice producers. It may also be very beneficial for corn growers and some other commodities.
The other, called Agricultural Risk Coverage (ARC), is a new income support program initially developed and supported by corn and soybean interest groups. On a crop by crop basis, farmers can choose between the PLC and the ARC subsidy program. They are free to pick the programs they believe will be most financially beneficial to them, but then have to stick with their decisions until Sept. 31, 2018, when the current farm bill legislation expires.
Last month, the U.S. Department of Agriculture estimated that farmers will receive over $5 billion in subsidy payments this year from just these two new programs. Realistically, PLC and ARC are likely to be much more expensive than the programs they replaced. They are intended to provide exceptionally generous subsidies to the same farmers who used to receive subsidies under the Direct Payments program.
Eighty percent of the total PLC and ARC subsidies will flow to farms who are in the top 15 percent, the largest and most successful farms that are least in need of any government bailout. Payments to individual farms under these programs are notionally capped at around $250,000 per farm. However, with the help of competent agricultural lawyers, farmers have become experts at legally navigating their operations around such payment limits.
Dairy farmers were not forgotten. The new "Dairy Margin Protection Program" guarantees that any dairy farmer that signs up will have a positive margin between the prices they get for their milk and their feed costs. Depending on participation (the program has already proved to be popular with milk producers) in years when corn prices are relatively high and milk prices relatively low, the taxpayer will be on the hook for billions of dollars, far more than has been spent on average on dairy subsidies over the past 10 years.
Cotton producers were also taken care of in the 2014 farm bill. Following the adverse outcome of a World Trade Organization dispute case with Brazil over U.S. export and other cotton subsidies, producers lost access to the benefits from several long-standing cotton subsidy programs. Instead they were given a potentially very lucrative new cotton insurance program, called the Stacked Income Protection plan (STAX). Payments are based on shortfalls in cotton revenues in the counties where cotton producers farm.
Taxpayers will pick up over 80 percent of all indemnity payments and administrative costs associated with the STAX program, most likely a substantial bill. The largest cotton farmers will get most of the benefits of the new program because there are no payment limits. The more cotton a farmer grows, the more subsidies they will get. Cotton farmers will have substantial incentives to expand cotton production in the environmentally fragile lands of west and north Texas.
Sugar producers, of course, get to keep their longstanding "no cost to the tax payer" farm bill program based on import restrictions and some limits on domestic production. That program is a continual source of friction in U.S. trade negotiations, and costs U.S. consumers (that is, the taxpayers on whom the program is supposed to impose no costs) between $3 billion and $4 billion a year.
Step one in farm policy reform should be very simple. None of these price and income support programs should ever have been introduced. The underlying premise for them — that farming is an exceptionally risky business, and farmers are relatively poor and in a highly vulnerable financial situation — seems transparently invalid. So, all these programs should go.
Federal crop insurance boondoggle
The largest farm subsidy boondoggle through which the farm sector milks the federal taxpayer is the federal crop insurance program. Currently, under this program, taxpayers fund over 60 percent of all indemnities received by farmers. For every dollar the average farmer pays out in premiums, he or she gets back more than $2 in indemnity payments without making any contribution to the program's administrative costs.
For farmers, crop insurance is an upside down Las Vegas gamble where the odds of winning are massively stacked in favor of the gambler, not the casino. The "casinos" in this case are the agricultural insurance companies, and they are not really losing any money because almost all crop insurance program losses are underwritten by taxpayers.
The evidence is clear. There are no caps on subsidies in the federal crop insurance program; the bigger and richer the farm, the more lucrative the crop insurance program. Because the risks of crop revenue losses from poor crops or low crop prices are covered, farmers adopt more risky production and financial strategies. They win if the risky decisions pay off; the taxpayer foots the bill if they don't. Farmers also have incentives to plant crops on lands that have poor soils, are environmentally fragile and that would never otherwise be used for crop production.
The federal crop insurance disproportionately transfers wealth and income to the largest farmers, wastes economic resources and generally has serious adverse environmental consequences. Step two in farm program reform: Terminate the federal crop insurance program.
Renewable fuels standard mandates
Many direct, trade and market-related hidden subsidies, as well as the crop insurance program, are authorized by the farm bill. However, farmers also benefit from other legislative initiatives. Today they are being substantially enriched by the current Renewable Fuels Standards mandates established through the provisions of the 2007 Energy Independence and Security Act. In 2013, those mandates required that about 40 percent of the U.S. corn crop and 15 percent of the U.S. soybean crop be used for ethanol production. This has had damaging consequences for the weekly food bill of every U.S. household.
The ethanol mandates have increased the prices of almost all the food items we buy in the supermarket and, as a result, every family's food bill has risen by about 2 percent. While that doesn't sound like much, a typical American family of four is now paying $250-350 a year more for groceries and restaurant meals.
In addition, by increasing the prices of corn, wheat and other crops which many of the poorest families in the world rely on to survive, the U.S. ethanol mandates have exacerbated malnutrition and hunger in sub-Saharan Africa and the Indian subcontinent.
From an environmental perspective, the ethanol mandates seem to be worth very little. Corn-based ethanol is now widely viewed as having a carbon footprint that is not measurably different than the carbon footprints of oil-based sources of energy.
Step three in developing a sensible U.S. agricultural policy should be to abandon the renewable fuels standard.
Should there be any farm subsidies?
The evidence compiled by economic researchers compellingly indicates that two areas of farm bill spending do provide very substantial benefits relative to their costs for both the general public and the farm sector. One is public spending on agricultural research which, for the most part, complements and increases the returns to private sector agricultural R&D investments. The benefits from public agricultural R&D for the average U.S. household have been enormous.
Individual farms are too small to fund major crop and livestock research programs, and most of the benefits from those programs show up in the form of increased on-farm productivity that increase crop production and lower food prices in the supermarket for all U.S. citizens. For similar reasons, federal programs that provide market and other forms of information to farmers, food processors, other agribusinesses, investors and the broader general public have also proved to be valuable.
What about direct subsidies to farmers? The "farming is an exceptionally risky business narrative" doesn't stand up to any sort of close examination. There is no good economic or social policy rationale for giving farmers help with managing the day-to-day and year-to-year risks associated with price fluctuations.
The same logic applies to most weather risks, which account for 80-90 percent of all crop losses. Catastrophic crop losses related to plant diseases and pest infestations are surprisingly relatively rare and could be covered by private insurance. Everyone who manages a farm is aware of these risks, and like most businesses they, not the taxpayer, should be responsible for handling them through their production, marketing, private insurance and financial management decisions.
At the same time, it is also true that farmers can lose a whole year's crop through extreme bad weather. Losses of this magnitude occur very rarely — but when they do, they can devastate farming operations. These are not everyday price and production risks and, while rare, in terms of the relative frequency of their occurrence, they are unique to the farm sector. This is where government agriculture policy can play a role.
It is technically feasible, and it would be relatively inexpensive, to develop well-structured permanent disaster aid programs that would trigger reasonable payments to farmers in areas where extreme weather has genuinely devastated their operations. These would not be the ad hoc disaster aid programs of the 1980s and 1990s which were largely driven by political influence. Payments would be based on objective criteria established independently of any individual disaster event.
Using data on daily rainfall and hourly temperatures already collected by the National Oceanographic and Atmospheric Administration (NOAA) from over 6,000 U.S. weather stations, clearly articulated disaster aid programs could provide reasonable levels of compensation to farmers for genuinely extreme losses caused by severe weather events. The programs could easily cover the traditional subsidy entitlement crops like corn, rice, cotton, peanuts and wheat, but also fruits, vegetables and other crops. They could be fairly targeted to farms in separate and relatively small areas of about 10-by-10 square miles.
A comprehensive permanent disaster aid program would almost surely cost no more than between $4 billion and $6 billion a year. It could easily be designed to alleviate any trade relations problems of the sort that are endemic to most of the 2014 farm bill subsidy programs. It would force farms to manage their everyday normal production and price risks for themselves; the risks they currently hand off to the tax payer because of the federal crop insurance, as well as price and income support programs. In addition, payments could be capped so that large farms needing very little government help would not be given hundreds of thousands of tax payer dollars.
An administrative blue print for such a program already exists. The current farm bill has reauthorized a disaster aid program for livestock forage production losses. In that program, farmers are compensated for about 60 percent of the estimated value of lost forage because of extreme drought, and the payments are triggered by the NOAA drought index for a county.
This type of disaster aid program would help farms only when they genuinely face extreme production losses that occur rarely (not daily or annually). The program would cost taxpayers about $12 billion a year less than the current plethora of handout programs that mainly benefit wealthy farmers and landowners. This would amount to a real farm income safety net reform at less than one-third of the cost of the current wasteful and poorly targeted federal farm subsidy program.Vincent H. Smith is a visiting scholar at the American Enterprise Institute and a professor of economics in the Department of Agricultural Economics and Economics at Montana State University.