Farming The Government

Volume V, Number 10 December 9, 1999

The FY 2000 budget provides for $8.7 billion in "emergency" farm spending, a record aid package that comes on top of $6.5 billion in emergency spending in the FY 1999 budget. Many are pointing to these "bailouts" as evidence that America's farm safety net is in tatters-and are calling for repeal of the 1996 Freedom to Farm Act, which ended commodity price support programs. Actually, the only thing in tatters is fiscal discipline. Contrary to critics' claims, the Freedom to Farm Act has not pauperized farmers, whose average household income and net worth exceeds that of other Americans. As for the commodity price supports, they distorted markets, undermined U.S. competitiveness, and hurt the environment-while, like most of our patchwork of farm aid programs, doing little to help those farmers who are truly in need. The White House wants to "revisit" the Freedom to Farm Act, and Congress has agreed to consider changes to the legislation early next year. Before leaders take a giant step backwards, they would do well to recall why we reformed farm aid to begin with.

A Grand Bargain

Let's start with some background. Federal farm aid consists of dozens of direct and indirect benefits, many dating back to the Great Depression-from subsidized crop insurance and marketing assistance loans to the special deals for peanut, sugar, and dairy farmers. While leaving most of this thicket intact, the Freedom to Farm Act ended one of the most costly and perverse entitlements: commodity price support programs. The programs worked as follows: Government set target prices for certain major crops-chiefly wheat, corn, rice, and cotton-and made "deficiency payments" to farmers whenever market prices fell beneath the targets. To limit the cost of the programs, government tried to curtail production, thereby propping up prices. Only officially recognized "acreage bases" were eligible for deficiency payments, and farmers were subject to mandatory "set-asides"-directives to leave land fallow that in effect paid them not to farm. Some farmers reaped large windfalls by "farming the government," as maximizing subsidies came to be known. But these were a privileged minority. In 1995, only one-third of U.S. farmers received a direct farm benefit of any kind. Among those who did receive a benefit, moreover, the biggest checks went to the biggest farms. Farmers with sales of $1,000,000 or more collected benefits averaging $35,716, compared with $4,453 for farmers with sales under $50,000. All told, the 32 percent of beneficiary farms with sales over $100,000 received 59 percent of all farm aid. Everybody else paid the bill for this perverse system-taxpayers through higher government spending, consumers through higher prices, and farmers themselves through lost market opportunities, both at home and abroad. Even the environment suffered, since higher prices encouraged farmers to cultivate more intensively the land government allowed them to plow. The 1996 Freedom to Farm Act offered farmers a deal. Government agreed to abolish supply controls, leaving farmers free to respond to market signals; in exchange, farmers agreed to give up price supports. Most welcomed the deal, especially since Congress sweetened it with $36 billion in special Agricultural Market Transition Act payments. These AMTAs are fixed-dollar benefits, payable whether prices rise or fall, that are scheduled to gradually decline over seven years. At the time, some were skeptical about a grand bargain in which all of the pain was back-ended. Initially, farmers had the best of both worlds: freedom to till their land and free access to the public till. With commodity prices at record highs in 1996 and 1997, it is estimated that farmers collected $11 billion more in benefits than they would have if reform had never been enacted. Then grain prices fell just as AMTA payments began declining. All of a sudden, the deal soured. So we arrive at today's bailouts. While a fraction of this year's $8.7 billion rescue package ($1.2 billion) is earmarked for farmers suffering from floods or drought-what most Americans understand as "emergencies"-the rest comes in the form of extra AMTA payments ($5.5 billion) and miscellaneous subsidies ($2.0 billion) which, like regular farm aid, are to be distributed without regard to income or need.

Dubious Arguments

If rural America were in the grips of another Great Depression, perhaps such untargeted assistance could be justified. But the farm lobby's grim rhetoric to the contrary, this is not the case. While some farmers are facing hard times, the overall ratio of farm debt to assets is now at its lowest level since the 1960s. Net farm income is indeed down from its peak in 1996, but average farm household income, which includes income from nonfarm sources, is up sharply-from 99 percent of the U.S. average in 1995 to 115 percent in 1998. So how is the largesse defended? One argument is that agriculture is uniquely risky, and that farmers lack the means to insure against that risk. Both parts of this argument are dubious. High-tech start-up firms may spend years developing products for which it turns out there is no market. Farmers at least know that someone will eat oatmeal. As for insuring against risk, farmers have many means, most already heavily subsidized: * There is federal crop insurance. The government pays the full premium for catastrophic coverage and part of the premium for supplemental coverage. The farm lobby says the insurance can't substitute for disaster assistance, since the catastrophic coverage is minimal and most farmers don't purchase adequate "buy up" policies. But this is backwards. If you knew that government were going to rebuild your house if it burned down, would you buy fire insurance? In principle, farmers forego any claim to disaster assistance if they decline to participate in the crop insurance program. In practice, this requirement is waived. * There is federal revenue insurance. Crop insurance protects against the disaster of a bad harvest, not the disaster of a too abundant harvest. In order to cover both contingencies, the Freedom to Farm Act introduced revenue insurance. It indemnifies farmers whenever revenue falls beneath a target, whether the shortfall is due to lost production or low prices. * There are federal marketing assistance loans. These loans, which function much like price supports, advance credit to farmers before harvest time. The amount of the loan is determined by the "commodity loan rate"-that is, the value assigned to each bushel of corn or wheat. If market prices turn out to be lower than the loan rates, farmers need only pay back a fraction of the full loan. Even farmers who haven't taken out marketing loans are entitled to collect a "loan deficiency payment"-a cash benefit equivalent to the loan subsidy enjoyed by farmers who have taken them out. * There are private futures contracts. Although few farmers directly participate in futures markets, many do so indirectly through forward contracts with local boards of trade or grain elevators. We also hear that farm aid is crucial because other countries subsidize agriculture even more lavishly than we do. This argument might make sense for an industry where subsidies can help firms secure global economies of scale, like those allegedly enjoyed by an Airbus or Boeing. But this is clearly not the case in farming. Just because other countries introduce massive inefficiencies into their economies is no reason for us to do so too. When all else fails, the farm lobby plays its trump card: Only generous government assistance, we are told, can save the small family farm. There's irony in farmers defending their flinty individualism by demanding more federal cash. But the irony aside, no one has demonstrated why across-the-board subsidies that go largely to agribusiness make small family farms more viable. Even those subsidies that do go to small farms are soon capitalized into the price of the farm-and thus over time into the size of the mortgage the typical small farmer must pay, leaving him no better off than before.

An Enduring Myth

In the end, U.S. farm policy rests on an enduring myth-that most farmers are one bad harvest away from the poorhouse. This may have been true in the days of Ma and Pa Joad, when the typical farmer's income was far beneath the national average and there was no way to insure against disaster. Back then, with one-quarter of Americans living on the farm, it was understandable that government should take a more active role in regulating agriculture. Today, all of that has changed. Just 2 percent of us live on the farm-and farmers, on average, enjoy higher incomes than other Americans. We should be debating how to target aid to the minority of farmers who genuinely need government support, not whether to reinstate a universal entitlement. Resurrecting price supports and supply controls won't save taxpayers money by forestalling future bailouts, as many pretend. And it won't help small family farmers. All it will do is lock in the farm lobby's claim to a large slice of the federal budget, while squandering a scarce resource-the public's trust in leaders who say they are willing to buck powerful constituencies in order to follow through on reasonable entitlement reforms.