Farm subsidies: The multibillion dollar question

Factions debate how to reform ag subsidies without destroying farms

By MATEUSZ PERKOWSKI

Capital Press

With the national government focused on reducing federal spending, farm programs that once seemed sacrosanct now look vulnerable, subsidy critics say.

The current farm subsidy programs have their origins in the Depression, with New Deal laws that sought to stabilize prices and provide a safety net to farmers. They have been altered and expanded many times since.

Under the greatest political attack is a program that provides direct and countercyclical payments to enrolled farmers who grow wheat, corn, soybeans, rice, upland cotton, barley, oats, oilseeds, peanuts, grain sorghum and certain dried legumes.

According to the USDA, direct payments are given to growers regardless of crop prices, at rates set by law for each commodity based on historical yields on the acreage enrolled in the program. Wheat farmers, for example, receive 52 cents a bushel.

In addition to direct payments, countercyclical subsidies are paid when commodity prices fall below levels set by the 2008 Farm Bill.

Proponents of the program say the subsidies help keep food costs low and provide a safety net to farmers when crop prices fall.

"I think what we overlook when people say we shouldn't be subsidizing farmers is they may not need it this year, but when we put a farm bill into place we don't write it for the good years, we write it for the bad," said Mary Kay Thatcher, director of public policy for the American Farm Bureau Federation.

Many farmers, supporters concede, rely on the direct payments as an important source of income. And producers have for years joked about "farming the programs."

Critics are more blunt.

"There's a myth that these farm programs are keeping family farmers on the land, but that's just not the case,"David DeGennaro, analyst with the nonprofit Environmental Working Group, said. "What we have is much less of a safety net than a guaranteed revenue stream."

New opportunities

Opponents of the current farm subsidy system see a big opportunity.

The current focus on cutting government spending is a turning point because lawmakers have begun questioning the utility of farm subsidies, DeGennaro said.

"The answer increasingly is we're not getting our money's worth," DeGennaro said.

Even some major agriculture groups recognize that public support for direct payments has eroded.

"It's worse than not there," said Bob Young, chief economist for the American Farm Bureau Federation. "It's negative at this point."

Though the group would like to keep direct payments, it hopes the program will at least be replaced with more insurance and risk management options for farmers, he said.

Corn farmers are the biggest beneficiaries of farm subsidies, but the National Corn Growers Association is also aware of shifting political winds.

The group expects that direct payments will be on the table during budget and farm bill negotiations, and then potentially on the chopping block, said Anthony Bush, a farmer and chair of NCGA's public policy team.

"The level this country is in debt is insurmountable and there should be no program that's off the table," Bush said. "We just feel like we can't defend them anymore."

Cutting commodity subsidies now would have a much smaller impact on the federal budget than it would have several years ago.

Cash payments to farms from commodity subsidy programs -- not counting insurance and disaster assistance -- are estimated to be $8.5 billion in fiscal 2012, according to the USDA's projection.

That's down from the most recent peak of about $20 billion a year during the mid-2000s.

Higher prices for commodity crops are an important reason for the decline. When such crop prices are weak and fall below certain target levels, the government pays farmers the difference.

In fiscal 2006, the most recent peak, such countercyclical payments topped $4 billion. In fiscal 2012, the USDA projects they will fall to zero.

Meanwhile, direct payments have consistently hovered at roughly $4 billion to $5 billion a year for nearly a decade.

"It's my view that the direct payments are indefensible," said Neil Harl, emeritus economics professor at Iowa State University. "Direct payments at a time of good commodity prices serve no public interest."

Harl said he would scrap direct payments but retain the countercyclical program to preserve food security, so long as the USDA returns to a system of production controls to prevent aggravating the oversupply.

"It's a question of balance," he said.

Myriad plans

That's not the vision of all farm subsidy critics. Although they agree the system should be overhauled, opponents have very different views of what should replace it.

The Heritage Foundation, a free-market think tank, would wipe the slate clean and leave it that way.

Diane Katz, a research fellow with the foundation, said commodity crop growers should follow the lead of other farmers who manage to survive without subsidies.

Some farmers would certainly suffer from the elimination of subsidies, but the total cost of such programs outweighs their benefit to society, she said. "I'm pretty confident taxpayers could make better use of that money."

Instead of subsidies, the government could establish a tax program to help farmers save for the future, Katz said.

Farmers could pay into a savings account during boom times and that income wouldn't be immediately taxed, she said. They could then withdraw those funds when their income -- and thus tax burden -- is lower.

A complete lack of subsidies would also prompt more farmers to manage risk by participating in the futures market, Katz said.

Doing away with government crop insurance and conservation programs would reduce competition for private companies and nonprofits, allowing them to take the reins, she said.

"I'm not out to punish farmers," Katz said. "I'm out to improve the system."

The Environmental Working Group would take a very different approach.

The group would preserve the Conservation Reserve Program, which pays farmers not to cultivate soils that are prone to erosion, and also create new environmental programs, said DeGennaro, the group's policy analyst. For example, payments could be tied to reducing fertilizer usage.

Subsidies should serve productive aims, he said.

"We're still supporting farmers, but we're supporting them for doing something positive for the environment," he said, noting that current programs have been cobbled together haphazardly and sometimes work at cross-purposes.

"Things have never been harmonized," DeGennaro said.

Various groups dispute the fundamental purpose of farm subsidies.

Food First, a think tank focused on the root causes of hunger, believes farm policy should be directed at stabilizing food costs for the poor.

Eric Holt-Gimenez, the group's executive director, said he expects low crop prices to eventually return to the U.S., particularly if the government backs away from ethanol policies that increase the demand for corn.

Before that happens, he thinks the nation should reconsider its approach to countercyclical payments. As the program is currently structured, it primarily helps major grain buyers and food manufacturers, Holt-Gimenez said.

"The issue is how to get farmers fair prices. The way we've done it is placate the industry with subsidies," he said.

The current structure of countercyclical payments prolongs price downturns by encouraging farmers to continue producing despite an oversupply, Holt-Gimenez said. That keeps commodities cheap for major buyers.

The U.S. should retain the concept of target prices -- however, instead of paying farmers when prices fall below certain targets, the government should directly buy crops from them at those target levels, he said.

That would establish a price floor for the commodity, since buyers would have to match the government's price to obtain the crop, Holt-Gimenez said.

The government would store the commodities it buys and release them when prices climbed, he said. "The real problem isn't subsidies. It's volatility."