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When agricultural subsidies were institutionalized during the New Deal era they kept the country fed and farmers solvent in the face of overlapping economic and environmental disasters. Subsidies were first offered in exchange for not growing major commodities after a decade of oversupply and declining crop values. The policy allowed production to be reduced while the farmer’s income remained constant. A three-part system of subsidies was introduced in the 1934 farm bill with the intent of regulating supply and stabilizing income for farmers regardless of market conditions (Agricultural Adjustment Act of 1933). While the details and names of the programs have changed over time, the overall policy of subsidizing commodity production to guarantee an ample supply of food has not (USDA, a).
 

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Today a farm subsidy is any money paid to a farmer by the government to facilitate the production of crops that take three primary forms: “countercyclical payments,” “non-recourse marketing loans,” and “direct payments.” Countercyclical payments are a payment by quantity—bushel, acre, hundred-weight etc.—on a covered commodity—corn, wheat, barley, oats, soybeans, rice, sorghum, dairy, sugar, peanuts, lentils, and honey—that kick in only when market prices fall below target prices set by the USDA (USDA, b).

The second program allows farmers to receive non-recourse marketing loans to help defray the cost of producing a crop. The crop is put up as collateral before planting. At harvest time if the market price for the crop has fallen below the amount of the loan, the farmer forfeits the crop to the USDA and the debt is discharged. The loans give a farmer operating capital in the spring, and the ability to withhold the crop from market during the fall when prices are at their lowest. They also provide a price support mechanism by guaranteeing that the crop will fetch at least the amount of the loan. If commodity prices are high, the farmer sells the crop for market value and repays the loan with minimal interest (USDA, b).

Like the countercyclical payments, marketing loans are not all that controversial and function in the same way. The purpose of both is to offer farmers a “safety-net” or “social contract”—fixed income in exchange for an uninterrupted domestic supply of food. But commodity prices are currently through the roof and record-smashing profits have become common. As a result, the third subsidy program—direct payments—have come under fire for being outdated, unnecessary, and trade distorting.

Direct payments are determined by owning “base acreage,” the amount of land a farmer owns that has historically produced a covered commodity. At planting time a farmer receives a payment by weight for 85% of the average yield on the base acreage. Current direct payments range from .24 cents a bushel for barley or oats up to .52 cents per bushel of wheat, with the other commodities falling somewhere in between (Food and Security Act 2008; USDA, b). Because the amount of the direct payment is calculated by owning base acreage, the policy encourages the concentration of land and subsidies in the hands of a few high-acreage farms, generally large corporate operations.

When the drought of 1934 arrived in the Bread Basket the farm sector was already reeling from the collapse of export markets that followed a global recession. Congress responded to the recession with reactionary measures in the Smoot-Hawley Act, which inspired similar protectionist tariffs around the world and accelerated the crisis. Farmers that managed to harvest a crop found that it was worth less than the cost of production. Disaster loomed but it provided FDR with both the leeway and incentive to reshape agricultural policy (Mantel, 1994).

It was a critical concern at the time with 27% of the nation engaged in fulltime agriculture, and approximately 20%  of the urban labor force unemployed. The USDA was tasked with controlling supply, which they aimed to accomplish by enacting price supports and removing cropland from production. Direct payments were offered to farmers as compensation for idling sections of land. The plan worked well until the sixties when improving technology and the Green Revolution began helping farmers yield far more on less acreage (Mantel, 1994).

By the seventies it was clear that subsidies had survived past the point of usefulness. The Food and Agriculture Act of 1977 implemented income caps for farm program eligibility—making farmers ineligible if their adjusted gross income is over $2.5 million a year for 3 years—but other reforms have been blocked by natural disasters and repeating cycles of recession (Hosansky, 2002).

Soviet grain purchases drove commodities to new highs throughout the seventies resulting in record profits and escalating land value in the Farm Belt. Venture capitalists rushed into the emerging market driving real estate values higher as they bought up available cropland. Production increased in leaps and bounds, but President Carter’s grain embargo of 1980, and another global recession caused commodity values to bottom out overnight. Interest rates went up as credit got tighter, and suddenly farmers that had expanded in the boom of the seventies were declaring bankruptcy in the eighties (Mantel, 1994).

Predictably, commodity reform was shelved and the next farm bill increased spending by adding additional subsidy programs—conservation and disaster assistance titles. Although President Reagan failed to reduce the purview and cost of the farm bill (a fleeting “signature” issue), his efforts set the table for another showdown following the Republican sweep of 1994. Speaker of the House Newt Gingrich was determined to end direct payments and their accompanying restrictions on production. His coalition was dependant on the farm vote who was chaffing over production limits because planting restrictions and production caps were limiting potential trade with burgeoning Asian markets (Hosansky, 2002).

The resulting 1996 Freedom to Farm bill represented a shift to market driven mechanisms regarding agricultural policy. In the 1996 bill direct payments were phased out over 7 years. In exchange, the limits on production were removed and planting restrictions were eased. It was assumed that farmers would plant for the market instead of USDA quotas. Direct payments would be gradually reduced until the next bill at which time they would be eliminated altogether (Federal Agriculture Improvement and Reform Act of 1996).
In reality, because direct payments were now detached or “decoupled” from supply control mechanisms, farmers overproduced driving market prices down. Soon after, the Asian financial crisis of 1997 crippled the expanding markets and farmers wound up receiving not only direct payments (whether or not they were still producing the covered commodity), but also countercyclical payments activated by plunging commodity values. With direct and countercyclical payments, plus additional “emergency assistance” spending, the “commodity reforms” of 1996 wound up costing $18 billion more than the previous bill. Supporters and opponents alike dubbed it the “Freedom to Fail” bill (Lilliston, 2000).

Stagnant prices for farm products continued through the turn of the millennium and Congress was afraid to tinker with the 2002 farm bill. The direct payments were extended for the duration of the bill and were continued in the 2007 legislation. But free market principles and awareness of farm policy flaws has slowly gathered together diverse advocates for change. And the profit margins of large producers these days are casting doubt about the legitimacy of subsidizing production.

Things have changed dramatically over the last three years. Commodity prices are breaking records. The target price for a bushel of corn in 2007 was $2.63 (Farm Security and Rural Investment Act of 2002). Today that bushel fetches $6.42 on the commodity futures market and it is expected to go higher when unfavorable weather and more profitable uses than food (such as ethanol production) create international commodity shortages this fall. Abroad, farm commodities are costing so much that food riots are erupting throughout the developing world as staple crops go to more lucrative export markets. The situation is so bad that the U.N. is organizing relief efforts, and the U.S. has authorized millions in emergency aid as well as a billion dollars worth of commodities.

High commodity prices are not the only thing driving reform efforts. Who receives the subsidies has become an important source of criticism among unlikely allies like Grover Norquist and Oxfam (Kondracke, 2007). Small farmers earn very little from subsidies, in fact they make 3/4 of their income from non-farm sources. There are 2.7 million farms in the U.S. 98.5% of them have a net farm income below $8,800 a year and average less than $1,800 in direct payments. For these farmers commodity subsidies provide a substantial portion of their revenue and they might be forced out of farming without them (Durst, 2007).

The 19 states represented by Agriculture Committee members receive 61% of all subsidies, but most go to only 3% of the nation’s farms. Those farms receive more than two thirds of all direct payments while producing 50% of all agricultural commodities (Durst, 2007). They each receive at least $44,000 per year in direct payments, and much more from other price support programs. 263 farms receive $200,000 in direct payments per year. 400 farms receive millions annually. The ceiling for subsidy payments is capped at $360,000 per year, but the cap is offset by deriving 75% of income from agriculture (Environmental Working Group, 2008).

The variety of ways in which ownership can be concealed in cooperative ventures makes it difficult to determine exactly who profits. The three-entity rule allows a farm owner to receive a full payment on one property, and half payments on two other farms. Additionally, spouses co-own farmland and are therefore eligible to earn subsidies as well. Giving a child a share of the base acreage and forming a three-entity association can allow the same farm to double its payments. By maneuvering property ownership and enrolling land in various cooperative associations, producers engage in a shell game concealing the extent of payments and the final beneficiary (Environmental Working Group, 2008).

Criticism is often directed at a group of speculators who have no intention of farming yet collect direct payments. Subsidy rights can be transferred with property rights. Because direct payment allocations are based on historic production of commodities on a particular tract of land, all that is required to receive the payment is to own the land. It is common for developers to buy former farmland, collect the direct payment, then rent the same land out for grazing cattle, for timber production, or another commercial use that doesn’t subdivide it for residential development. This group of entrepreneurs earned $1.3 billion in direct payments from the 2002 farm bill without ever planting a crop (Morgan, 2008).

A structural opponent of farm subsidies is expanding free trade agreements. The Doha round has been held up for years by developing countries alleging that the Western system of agricultural subsidies distorts trade. The subsidies make it impossible for farm products from poor nations to be competitive with cheaper goods from the U.S and Western Europe on international markets. This becomes more contentious when a poor nation has been obligated to engage in cash cropping for revenue because of structural adjustment. The U.S. has typically classified direct payments as “green-box,” or non-trade distorting measures. That stance is increasingly disputed, and is slowly but systematically being overruled by WTO dispute resolution tribunals such as the successful case against cotton (WTO DS267, 2007). The limit on green-box spending is $19 billion a year so the U.S. is under the ceiling, but nations will make a case that the payments provide unfair competitive advantages (Schnepf, 2005).

In response to the mounting critiques against subsidized agriculture the American Farm Bureau and other farm lobbies point out that the U.S. food dollar has much higher purchasing power than most other industrialized nations. That means that a market basket of commodities costs less in the U.S. than it would in the U.K. or Germany. “Americans spend 10% of their income on food—the lowest percentage in the world…in Japan 26% of income is spent on food” (Farm Policy Facts, 2008). The argument runs that reducing direct payments will cause the price of food to increase dramatically. Skyrocketing commodity costs and the deterioration of the dollar are eroding the strength of that position.

The longevity of the subsidy program is partially related to the structure of the bill itself. Each one is an omnibus monster with a variety of programs administered under the umbrella of agricultural policy. With ten titles ranging from forestry to energy, the bill bridges the concerns of social advocates, environmentalists, rural Americans, ideologues from both parties, and powerful lobbies. Proponents of each program tend to thwart commodity reform lest their pet project wind up the next target.

Attributing the failure to reform subsidy programs to an all-powerful farm lobby, unlikely coalitions, and compliant legislators is an oversimplification of many competing factors. The farm bill is in effect for 5-6 years over which time all of Congress is up for reelection at least once. That reality moderates reform movements from liberals and conservatives alike if they are reliant on the farm vote. There are 89 electoral votes in the Farm Belt. A president only attempts subsidy reforms during a lame duck period since alienating 89 out of 538 votes can doom even a popular incumbent seeking another term.

 Location is a better measure than party of a legislator’s willingness to consider reform. Urban areas tend to favor subsidy reform while rural areas want farm program expansion. The House is most inclined to entertain the notion of reform because the farm vote’s impact is diluted in the 435 geographically diverse congressional districts. There are 15 states in the Farm Belt proper, and many more with large agricultural sectors, making farm policy an important issue for at least a third of the Senate. The Senate version of the farm bill passed by a margin of 79-14; in the House the vote was much closer at 231-191.

In the Senate, the bill requires a supermajority of 60 votes to amend. This is due to a procedural maneuver executed in December by a Southern coalition led by Democrat Blanche Lincoln. Lincoln threatened a filibuster if the supermajority rule wasn’t enacted to block Bush Administration reform efforts. Senate leadership agreed to it instead of facing the embarrassment of a filibuster from within. Reform measures managed a simple majority of 49-48 but fell well short of the 60 needed (Crowley, 2007).

The competing versions of the bill sponsored by the main players illustrate the conflicting priorities. The House bill reduced costs slightly while the Senate version increased spending by $10 billion. When the Bush Administration asked for an income cap of $200,000 on program eligibility, the Senate countered with an offer of $900,000, and the House proposed $500,000. White House requests included repealing the three-entity rule, and the elimination of the 75% exemption on income for farm program eligibility, but neither was popular in the Senate.

Despite a spirited and oftentimes heated debate surrounding the passage of the new bill, reform measures are minimal. The White House has indicated its intentions to veto the bill but Congress has the support to override it. The three-entity rule will be eliminated, and the income cap is being substantially reduced to $500,000, but direct payments and the income exemption have survived unscathed. The new bill also retains countercyclical payments although it has renamed them “revenue assurance” programs. Still being negotiated is a provision for the marketing loans where the farmer agrees in advance to either surrender the crop or repay the loan. The change would allow the USDA instead of the farmer to collect the profits in the booming commodity market (Farm, Nutrition, and Bioenergy Act of 2007).

$3 billion is earmarked to expand biofuel programs, biofuels that come overwhelmingly from subsidized corn, sugar, and soybeans. Existing programs are already under fire for diverting essential commodities to fuel production thereby playing a central role in contemporary food riots throughout the developing world. Criticism from environmental circles is sure to increase because of provisions allowing biofuels to be produced on conservation program acreage without meeting sustainability standards. The conservation title itself is likely to be contentious. While spending on the title is increasing, it is doing so by reducing the acreage enrolled. Acreage isn’t being cut directly, but as lease agreements expire during the new bill they will not be renewed. With 30 million acres enrolled, and 4 million acres with leases set to expire during the life of the bill, the reduction will be substantial (Farm Bureau News, 2008).

    A strong Bread Basket coalition in Congress, a powerful well-funded farm lobby, and an uncertain political climate surrounding the national elections in November have allowed subsidy programs to survive another round of legislation. While the cap on payments has been technically lowered from $365,000 to $200,000 per year, the limit on “price supporting measures” has been lifted altogether. This could actually increase payments well beyond the old cap depending on market conditions and the amount of base acreage (Abbott, 2008). Change in the next bill is not likely, there are philosophical arguments against federal regulation and the socialist nature of government planning in agriculture from analysts at the Heritage Foundation, but those complaints have little traction in rural America and go largely ignored by the bicoastal electorate.

Direct payments should be eliminated and as knowledge spreads of their uselessness and potential for abuse, opposition to the system will increase. Meaningful reform will be gradual and some assistance will always be a feature of agricultural policy. A precondition for being a superpower is to produce a food surplus freeing up labor and capital for more lucrative investments. The U.S. has no intention of getting out of the superpower business anytime soon so the safety net will have to remain in place. Commodity values fluctuate wildly; drought, flooding, or a swarm of locusts can wipe out bumper crops. These facts justify revenue assurance in exchange for food security.

But with farm income guaranteed by price supports when necessary, and the new disaster relief trust fund, there is no sound economic argument for continuing the direct payments. The most likely scenario for change will be with urban dominance in both the White House and Congress to offset the Farm Belt bloc. But additionally, it will most likely need to be urban-based conservatives in power, ones that have been elected with a new electoral map that doesn’t feature the Bread Basket. Not a likely development in the immediate future.

More than just the interests of Middle America are represented in each bill. Liberals have many incentives to support the current system. Food Stamps and school lunch programs receive 2/3 of the appropriations, both issues are important to powerful Democrats in the House like Speaker Nancy Pelosi. Conservation programs score high marks with environmentalists whether they are advocating for biological diversity, clean water, or against urban sprawl. Separating social spending and other programs with broad popular support—like conservation and rural investment—from farm subsidies could make direct payments vulnerable to elimination. But those types of amendments would take a supermajority vote to even consider the matter—once again not likely.

As trade liberalization agreements come to have more power over policy decisions, subsidies will face their most serious threat. Brazil, flush with the success of its cotton subsidy litigation at the WTO, is taking aim at other commodity programs. Even Canada is weighing its options regarding U.S. corn subsidies. Powerful interests not beholden to rural America are very much in favor of increasing free trade and will ultimately have to address farm policy to achieve their goals. The U.S. produces far more commodities than can be consumed domestically and relies on exporting them for economic stability. U.S. commodity exports are 20% of the global market. When the economic cost of retaliatory sanctions for retaining subsidies becomes high enough, and market dominance is threatened by keeping them any longer, direct payments will be overhauled.

Works Cited:
Abbott, Charles. “Subsidy Reform is Touchy Subject for Farm Law.” The Washington
     Post April 28, 2008.
Crowley, Sean. “Senate Blasted for Squandering Farm Policy Reform Opportunities by
     Leading Environmental Group.” Environmental Defense Fund Press Release
     December 14, 2007. .
Durst, Ron. “Effects of Reducing the Income Cap on Eligibility for Farm Program
     Payments.” Economic Research Service/USDA No. 27, September 2007.
Environmental Working Group.
Farm Bureau News. “CRP Under Pressure From High Grain Prices.” March2008.
Farm Policy Facts. “Complete Facts of the Day.”
                   
Hosansky, David. “Farm Subsidies.” CQ Researcher May 17, 2002. Vol. 12, No. 19.
     Pages 433-456.
Kondracke, Morton. “Big Ag Faces Fight On Farm Subsidies From Bush, Reformers.”  
     Roll Call April 12, 2007.  
Lilliston, Ben. “Freedom to Fail: How U.S. Farming Policies Have Helped Agribusiness  
     And Pushed Family Farmers Toward Extinction.” Multinational Monitor July/August  
     2000. Vol. 21 No. 7.
Mantel, Barbara. “Farm Policy” CQ Researcher December 2, 1994. Vol. 4 No. 45.
Morgan, Dan. “Emptying the Breadbasket.” The Washington Post April 29, 2008. Pg.  
     A01.
Schnepf, Randy. “Agriculture in the WTO: Limits on Domestic Support.” CRS Report
     For Congress May 10, 2005.
USDA Economic Research Service. “Farm and Commodity Policy: Basics of U.S.
     Agricultural Policy.”  
     http://www.ers.usda.gov/...
USDA Economic Research Service. “Farm and Commodity Policy: Program Provisions.”
     

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Originally posted to Brendon Fisher on Mon May 26, 2008 at 11:29 AM PDT.

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