Economics, Taxes and Spending

New farm bill likely to be a budget and trade disaster

Parents know how often children confuse their wants with their needs. A child may hunger for a glitzy new bike, but if she already has one in perfect working order there is no need for a new bike to get her to school: She just wants one. In the same vein, the chair and ranking member of the House Agriculture Committee have confused farmers’ wants with their needs. Farmers just don’t need large taxpayer subsidies. They are enjoying record market prices and record profits, have almost no debt (the average debt to asset ratio in farming is less than nine percent), and are ideally placed to manage price and production risks by themselves. Moreover, the farm households who receive about 80 percent of the subsidies are typically multimillionaires with annual taxable incomes in the hundreds of thousands of dollars.

But according to Representatives Frank Lucas (R-Oklahoma, and himself a potential beneficiary of farm programs as the operator of his family’s farm) and Colin Peterson (D-Minnesota), the chair and ranking member of the House Agricultural Committee, farmers both want and need lots of protection from the marketplace and big subsidies if prices for field crops fall from their current record levels, just so their record profits would be locked in. To meet these wants, Representatives Lucas and Peterson have invented a new farm bill program called Price Loss Coverage that is spelled out in the House Agricultural Committee’s draft Farm Bill, released last Friday.

Effectively, Price Loss Coverage is a price-based income support program. When the market price for a commodity covered by the program falls below a new and, by historical standards, very high target price level, farmers will almost certainly get a payment for every acre they plant of that crop. The payment is driven by the difference between the target price and the market price and is likely to be very generous to farmers and expensive for taxpayers if market prices for a commodity simply equal their fifteen year historical average levels. For example, the proposed target price for peanuts is $535 a ton, but the fifteen year average price for peanuts is $463 a ton, and market prices have been lower than that in four of the past five years. The new target price for corn is $3.70 a bushel and corn’s fifteen year average market price is $2.93.

The Congressional Budget Office has estimated that this new price support program would cost around $3 billion a year, but assumes that prices for major commodities such as wheat, corn, and soybeans will remain close to or at their current record levels. However, if prices for covered crops return to their fifteen year historical averages for the period 1996-2011, which includes years with record high prices (such as 1996 and 2011) as well as years with low market prices (for example, 2000 and 2001), then the picture becomes very different.

Table 1 presents initial estimates of how much would be paid each year to corn, wheat, soybean, peanut, and rice producers on a national basis and on a per acre basis if prices were at their fifteen year average levels and planted acres for each crop were at their most recent five year averages. A few thousand peanut producers, mainly located in Georgia and adjacent states, would receive a total of $131.5 million in subsidies at a rate of about $104 per acre, and a farmer with 500 acres of peanuts would get a taxpayer subsidy of over $50,000. Rice growers do even better. In total, the nation’s rice producers would receive about $880 million at a rate of about $289 per acre. No wonder both the rice and peanut lobbies are enthusiastic about the House’s draft Farm Bill, which would give them much larger subsidies than the Farm Bill recently passed by the Senate.

Corn and wheat producers would not do too badly either in those circumstances, with respective total annual payments of $9.5 billion and $2.7 billion at a rate of $107 per acre for corn and $47 per acre for wheat. Nor would soybean producers be too unhappy, receiving a total of $3.2 billion in annual subsidy payments at a rate of $43 per acre.

Representatives Lucas and Peterson would satisfy lots of farmers’ wants if their proposed farm bill Price Loss Coverage is accepted, but not many genuine farm needs. However, those “vacation in Hawaii, Cadillac and leather seated pick up” wants of the farm lobbies would come at a potentially enormous budget deficit and taxpayer cost. For just these five commodities – corn, wheat, soybeans, peanuts, and rice, taxpayer costs would be about $16.5 billion a year, a far cry from the CBO estimate of about $3 billion a year, which assumes that crop prices will continue to be at or close to record high levels. Other substantial costs would be incurred in providing subsidies to barley, lentils, oats, peas, grain, sorghum, and oil seed crops such as canola and sunflowers. Moreover, annual subsidy payments of this size, coupled with an additional $7 to $10 billion in crop insurance subsidies, would clearly violate the United States’ WTO commitments and create enormous trade relations problems.

All in all, the House PLC program has a real potential to be both a budget and trade relations disaster. Worse, it will do so at an estimated taxpayer cost of about $16 billion a year if prices return to recent historical average levels. The new House farm subsidy proposals are likely to be more than twice as costly for taxpayers as the recently passed Senate Bill shallow loss program, which itself is a potential budget buster that would cost an estimated $6 to $7 billion a year under the same circumstance (Smith, Babcock, and Goodwin). If Congress is in fact serious about deficit reduction, then both Congress and the nation are being poorly served by this bipartisan move on the part of the current House Agricultural Committee leadership.

Estimates of the potential costs of the shallow loss program included in the Senate Farm Bill are presented in the AEI study Field of Schemes: The Taxpayer and Economic Welfare Costs of Shallow Loss Programs by Vincent Smith, Bruce Babcock, and Barry Goodwin.

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