Are All Farm Subsidies Giveaways to Corporate Farmers? Nope, Here's a Rundown on Both Good and Bad Subsidies
With the 2012 farm bill less than a year away, farmers and eaters alike are already thinking about the changes they would like to see in it. Unfortunately, the subsidies that dominate much of the debate are complex and, for many, confusing.
Furthermore, in the past few decades, the issues have become even more complex, as commodity subsidies are now subject to rules set by the World Trade Organization (WTO) that prohibit trade-distorting subsidies and price supports. But understanding the farm bill is not impossible. And, while many subsidies seem like baseless giveaways to corporate farmers, there are others that can actually help improve the sustainability of our food system. Here's a sample of both the bad and the good.
Direct payments are perhaps the easiest subsidies to understand, and they are also the primary reason why farm subsidies come under such criticism during times of high commodity prices. In 2011, prices for commodities like corn and soy have reached record highs. Corn, which once sold for $2/bushel, now goes for over $7. It appears that farmers are making a killing, although with high fuel prices eating into their profits, many -- particularly small and mid-sized farmers -- are not. The reason for the high prices is a combination of factors such as ethanol, speculation and weather. Surely, in such a strong market, farmers do not need subsidies, and yet they still receive them.
The subsidies they are receiving are direct payments. This is money given to farmers based on their historic acreage and yield whether they need the money or not. In fact, farmers receive their direct payments whether or not they are growing anything on their land. Direct payments are purely calculated based on historic acreage and yield (referred to as a farmer's "base"), with no relation to current yield, price or need. Base is tied to a piece of land, not a farmer, so if a farmer sells 1,000 acres where he or she historically yielded an average of 160 bushels of corn per acre, the new owner of the land receives the direct payment calculated for that base.
Direct payments were first passed into law in the 1996 farm bill. The WTO went into effect in 1995 and in joining the WTO, as Institute for Agriculture and Trade Policy's Sophia Murphy puts it, the White House "did a bit of an end run around Congress." The United States was now bound by the rules of the WTO, which did not allow our traditional subsidy system, but there was no Congressional buy-in to end all farm subsidies. Direct payments were instituted as the solution. They still gave farmers a safety net of sorts, but they were not determined by current prices or yields, and thus would not impact a farmer's planting decisions.
Dan Imhoff, author of Food Fight: The Citizen's Guide to a Food and Farm Bill, notes that even though direct payments comply with WTO guidelines, "the average person looking at $5 billion in taxpayer money that goes right into the hands of landowners whether they are farming or not, whether they have an economic need or not, with commodity markets and farm assets as strong as they are, has to really why there aren't stricter income caps and eligibility requirements."
He adds that if direct payments are eliminated, "one real fear is that those $5 billion in direct payments will just be eliminated from the overall budget rather than being redirected to something with real social benefit--like feeding school kids more fruits and vegetables and grass-fed local animal products or revitalizing local food systems."
The future of direct payments is still up in the air. Mike Adams, host of the radio show AgriTalk, has suggested the government only pays direct payments when commodity prices fall below a certain level, perhaps reflecting the sentiments of some farmers who worry that direct payments are hard to defend in years when prices are high.
Rep. Frank Lucas (R-OK), Chair of the House Agriculture Committee, has made statements that he'd like to keep direct payments in place because they are the most WTO compliant of our commodity subsidies. (The two other types of commodity subsidies are only paid when prices fall below a certain level, making them more sensible in the eyes of American taxpayers but less defendable to the WTO.) Tom Vilsack, the Secretary of Agriculture, on the other hand, has voiced his support for Obama's plan to cut off direct payments to the wealthiest farmers.
In the past several years, government subsidized crop insurance has become a more important part of farmers' "safety net" without breaking WTO rules. Both Tom Vilsack and Senator (and former Secretary of Agriculture) Mike Johanns have made statements that they are in favor of continuing or even expanding crop insurance programs. Yet crop insurance is rarely part of the discussion among non-farmers.
Ag policy expert Daryll Ray provides an explanation of crop insurance. In the past, he says, farmers weren't insured against the sorts of problems that would impact all farmers in a region at the same time, such as low price or low yield. "If there were a drought, it is likely that it would affect most of the farmers in the county or even in the state or broader sections of the country. As a result, for a private insurance company to insure yield, the premiums would typically have to be higher than most farmers would be willing to pay."
In recent years, insurance against low price and low yield is available, thanks to government subsidies that allow insurance companies to offer premiums that farmers can afford. Farmers are not obligated to buy crop insurance, but often bankers require it for a farmer taking out a loan, and the government will not provide disaster relief payments to farmers who do not have crop insurance.
With crop insurance, farmers can't lose. If they lose their crop, or if prices fall below the cost of production, the farmers are guaranteed a payout from crop insurance. Some farmers have chosen to plant crops in inappropriate, risky places where they would not have done so in the past. Without crop insurance, they might have lost the crop and lost money. With crop insurance, they'll profit no matter what.
Insurance companies can't lose either. As Ray explains, "the government subsidizes the risk above an agreed-upon level. In addition, the government payments cover a portion of the cost of their operation plus a reasonable profit on the policies put in force." Crop insurance is, essentially, the privatization of farm subsidies. Now, instead of money changing hands from the taxpayers directly to farmers in need, it goes through the insurance companies, who collect a profit. And, with farmers now able to plant in riskier places, taxpayers are stuck subsidizing that increased risk and the crop losses that result from it.A
The farm bill authorizes a number of conservation programs, but they fall into two main categories: programs that pay farmers not to plant on environmentally fragile land and programs that pay farmers to use various conservation practices on land they keep in production.
An example of the former is the Conservation Reserve Program (CRP). Farmers enroll their land in CRP for periods of many years at a time. Rep. Lucas has suggested he'd like to cut the number of acres in CRP, to allow farmers to plant on more acres. Marginal lands, which might only produce mediocre yields, might not be profitable to plant on in times of low prices. With sky-high prices, however, farmers could plant on this land and still make a profit. Farmers who might have enrolled their land in CRP when prices were lower may be eager to plant on them now. Rep. Collin Peterson, (D-MN), the highest ranking Democrat on the House Agriculture Committee, disagrees with Lucas, because he feels that the land currently enrolled in CRP probably should not be cultivated for environmental reasons.
The other category of conservation programs is exemplified by the Conservation Stewardship Program (CSP), which pays farmers to adopt sustainable practices on land that is in cultivation. CSP was the creation of Sen. Tom Harkin, an influential member on the Senate Agriculture Committee, and he will likely be an advocate for it in the next farm bill debate. Analyses of CSP show that it is a popular and effective program, but it is underfunded so relatively few farmers can benefit from it. Many farm bill reformers see conservation programs like CSP as a way to make our food system more sustainable.
"I'm a real believer in 'no subsidization without social obligation,'" says Imhoff. "And to me, helping landowners to protect waterways, prevent soil erosion, develop chemical free production techniques, and enhance habitats are the highest form of social obligation. These are things the market doesn't compensate landowners for, and we all have an interest in safekeeping natural resources. Somehow, all of our subsidy programs should become conservation-based."
Moving the money currently going to farmers under traditional subsidy programs into conservation programs like CSP could help farmers retain their safety net while paying them for maximum sustainability instead of maximum yield. Furthermore, the WTO does not limit conservation payments as it does other types of subsidies. Imhoff sees a future in which conservation programs help the U.S. "move toward livestock production over the next 50 years that is largely grass and pasture based, leaving the industrial concentrated animal feeding operation a relict of the past. It will be better for the land, better for our health, better for the animals-and a responsible taxpayer investment in the food and farming system."
Unfortunately, those in power in Washington have made no signals that they are moving in this direction for the 2012 farm bill.